As wheat production forecasts get higher, wheat price forecasts are getting lower.
The Canadian Wheat Board last week reduced its 2004-05 pool return outlook for wheat by between $9 and $15 a tonne, depending on class and quality.
The new PRO for 1CW 13.5 percent wheat is $207 a tonne, down from last month’s $220, basis export position.
The reason for the bearish move couldn’t be much simpler, said David Boyes, market analyst with the Winnipeg-based grain marketing agency.
“There’s just a lot of wheat out there,” he said. “Everybody’s growing wheat this year because the price signals haven’t been too bad, especially if you’re a low-cost producer.”
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The number that tells the tale comes from the United States Department of Agriculture, which is now forecasting a world wheat crop of 608 million tonnes, the second biggest on record.
Last month, when the wheat board issued its previous PRO, the world crop was projected to be 598 million tonnes. Last year’s crop totalled 551 million tonnes.
“That’s the big factor,” said Boyes. “U.S. wheat futures have been coming under pressure for a while in expectation of larger U.S. and world crops.”
The USDA has forecast a U.S. wheat crop of 58 million tonnes, slightly ahead of the five-year average.
The board said the increased projections for U.S. wheat have reversed previous expectations of a decline in U.S. ending stocks for July 2005.
While most of the market pressure is downward, some factors are working in the other direction.
Tight global carry-in stocks and quality concerns in North America, parts of Europe and the Black Sea region could limit the growth in supplies of good quality milling wheat and support the market in the coming months.
Boyes said the latest PRO takes into account the effect of the Aug. 20 frost that hit wheat growing areas of Canada and U.S.
As far as the wheat market goes, the main impact of the frost will likely be in the area of price spreads rather than the overall prices.
“I think we’ll see, depending on what happens with quality, cash premiums changing, basis levels changing and quality premiums changing,” he said.
The frost will have its biggest impact in the feed grain prices. A lot of barley, and potentially some wheat, will be moving into the feed market that’s already being pressured by a record U.S. corn crop, aggressive competition from Black Sea exporters and the impact of BSE on the domestic market.
Because of all that, the board reduced the PRO for feed barley to $116 a tonne from the previous month’s $127.
