Low wheat supply causing concern

Asupply concern is occurring in the world food situation today, causing ripples that are being felt in the wheat market.

“In seven of the last eight years, wheat consumption has exceeded production even though consumption levels have been relatively stable,” says Mark Welch, Texas A&M University economist. “We're about 100 million metric tons short over the past eight years in the world wheat market.”

USDA has continued to reduce the size of the U.S. wheat crop, says Welch. “But with high prices, export estimates have grown each month. We're still selling wheat on the world market, even at the record-high prices we're seeing today in addition to a continuing drawdown in stocks,” he says.

The real story, he says, is the record-low stocks-to-use ratio, down now to about 18.2. “We can look at that in terms of the amount of wheat that will be left on hand at the end of the marketing year on a days-of-use basis. Given the current rates of consumption, how many days-of-use of wheat will be left at the end of the marketing year? Estimates are down to about 66 — a record-low level. Last year was the first time this estimate had dropped below 75.

“Since 1960, the average has been about 107. For a staple in the world's diet such as wheat, these numbers are causing concern,” says Welch.

However, the market is anticipating the supply situation eventually will correct itself.

“Looking at the closing prices of futures contracts, the record-high prices carry through to about March of 2008, and then we see a significant decline. They are still high prices but the market is anticipating we will correct this supply situation,” he says.

Looking at the European wheat trade, exports of wheat went from 20 million metric tons down to about 10, says Welch, with import levels running relatively the same.

“Four years ago, India was exporting 5.5 million metric tons of wheat. Last year, they imported 6.5 million tons. USDA estimates 3 million metric tons this year, but sources within the government of India are estimating imports at back up to 5 million metric tons. India's government is concerned about adequate wheat supplies for the coming marketing year. There's no concern for production, but they're concerned about their stock levels falling too low. So even with record prices, India has been a strong buyer in the market, trying to shore up its wheat supplies,” he says.

There are concerns in Russia over food inflation, says Welch, and sources within that country are talking about the possibility of either placing a cap on wheat exports or placing such an extensive tariff on those exports that it would virtually shut them off.

“All of these factors are creating a lot of uncertainty in the world wheat market, and that's why prices are being driven as they are. Those concerns won't go away overnight,” he says.

Some growth in exports is expected from Australia while a decline is projected from other major exporters — the EU, Argentina and Canada. “World wheat exports from the top five exporters have declined by 9 percent over the past two years. The top five are supplying less to the world wheat market. Trade versus production is roughly the same at about 18 percent, but the wheat coming from major exporters is in decline.”

It's not certain at this point how much wheat will be planted this fall, says Welch. “Looking at moisture conditions throughout the country, conditions are good in the central part of the United States where most of the wheat is grown, and yields are expected to increase. Last year, about 60 million acres were planted. The record was in 1960, when about 88 million acres were planted. If every state were to plant at record levels, we would be up over 90 million acres,” he says.

In the current marketing year, says Welch, about 93 million acres of corn were planted, 64 million acres of soybeans, 60 million acres of wheat, and just under 11 million acres of cotton.

“This is ‘round 1’ of the battle for acres, and corn did pretty well. With wheat prices what they are and soybean prices what they are, we have yet to see the elbowing that will take place in the battle for acres next year. The competition for acres will create some interesting pricing opportunities this winter. The question is, can a producer take these opportunities? In a drought situation particularly, it's a hard decision to make.”

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