Domestic wheat prices may ease by 10% in 2007

Despite an estimated 12 per cent decline in the output of the four top exporters "� the US, Canada, Australia and the EU "� who account for 64 per cent of global trade this season, the wheat prices in India are projected to ease in the range of 10 per cent in 2007, a report from Standard Chartered Global Research said.

This will put a huge pressure on global stocks, the report added.

The US Department of Agriculture (USDA) anticipates global stocks to fall to 121 million tonne, the lowest level in 25 years.

Australia, the third largest exporter accounting for 14 per cent of global wheat exports, has been the worst hit. Drought conditions have reduced the forecast for 2006-07 wheat crop to 9.7 million tonne, down 61 per cent from the previous year.

With domestic use estimated at 6.2 million tonne, only 3.5 million tonne will be available for exports, compared with 16 million tonne in 2005-06. The ongoing drought will also affect the next summer crop.

Meanwhile, the Chinese government has been auctioning grain stocks since November to keep domestic prices under control. The stocks were built up under the minimum purchase price programme that had been in place this year to support prices, the report said.

There is some uncertainty surrounding the level of China's harvest, but it appears to have moved steadily higher over the last few years, and, according to customs data, China has been a net exporter of wheat so far this year.

However, domestic prices in China rose sharply during November, driven by high international prices. The consequent auctioning of the stocks has brought prices down, but they still remain inflated.

Speculative activity has been intense, net non-commercial positions on the CBOT have reached a new high, close to 27,000 contracts recently, leaving the market vulnerable to correction. Markets are expecting a further surge in the fund interest in

January, which can push prices up.

However, planting intentions and current moisture conditions point to a good US winter wheat harvest in 2007. High prices should also stimulate output elsewhere.

According to the ministry of agriculture in India, planted acreage for the next crop is up 17 per cent y-o-y. Weather permitting, improved output should allow prices to ease through 2007.

Wheat prices have eased back from their peak in mid-October, but are still up 37 per cent year-to-date due to poor harvests, most notably in Australia, but also in the US, the EU and Ukraine.

In addition, India resumed importing wheat for the first time in 6 years. However, high prices are beginning to have an impact on demand for US exports and weather conditions have been more favourable for the 2007 winter crops in the northern hemisphere.

These, together with indications that Ukraine will resume exports, have allowed future prices to soften by some 14 per cent.