Wheat rally belies Goldman, US govt forecasts

The biggest rally in the history of wheat trading defied even some of the best conventional wisdom, humbling forecasters from Goldman Sachs Group to the US government.

Wheat has more than doubled since May, reaching a record $11.53 a bushel on February 11 and driving up costs for everything from Eggo waffles and Italian pasta to Pakistani flatbreads and Japanese pastry.

This month the world's biggest securities firm scrapped projections for a price drop within 90 days, and the US, the biggest exporter, said it would ship 23 per cent more than originally estimated before summer.

"The supply shortage has been much more acute than what we had expected,'' said Ruifang Zhang, a commodities analyst at Goldman in London.

The firm, which was right about the trajectory of crude oil last year, raised its three-month price target to $13.50 from $9.20 on February 8.

Wheat set a record 16 times since September, resonating around a world that relies on the grain more than any food crop except rice.

Exporters Argentina and Russia halted sales or raised taxes to protect dwindling reserves. Pakistan boosted imports as inflation in January rose 12 per cent, the most in 33 months.

Farmers aren't keeping pace with the diets of a burgeoning middle class in India and China. The Department of Agriculture predicted February 8 that US stockpiles for the 12 months through May will drop 40 per cent to the lowest since 1948 as global production lags behind consumption for the seventh year in eight.

Droughts and rain damaged crops in Australia, France and the US last year, thwarting bets that higher prices would reverse the trend by encouraging bigger harvests.

Unprecedented demand
"There's been unprecedented demand globally for grains,'' said Gordon Davis, managing director of Melbourne-based AWB, the largest wheat exporter in Australia. "It's being driven by demand for protein in Asia, which reflects rising incomes.''

Even farm animals, which eat 16 per cent of the world's wheat, are driving consumption as alternatives such as corn feed get more expensive. The appeal of corn-based ethanol is increasing as the US government sets mandates for alternative energy sources.

Wheat's most-active futures on the Chicago Board of Trade rose more than $7 a bushel between April and the February 11 high. Before then, they hadn't exceeded $6.36 in the 159-year history of the world's biggest grain exchange. Wheat for May delivery rose 2.25 cents to $10.4425 a bushel as of 10:27 am in London.

Bread-price gains
In the US, a one-pound loaf of bread sold for an average $1.28 in December, 13 per cent more than a year earlier, as the cost of flour increased 25 per cent to 39.8 cents a pound, Bureau of Labor Statistics show.

Sara Lee Corp, a bread and cake maker based in Downers Grove, Illinois, raised a loaf 20 cents between September and December because its wheat costs soared.

Fourth-quarter profit at Battle Creek, Michigan-based Kellogg Co, the largest US cereal maker, fell 3.3 per cent as price increases failed to keep pace with the higher expense of making Eggos, Frosted Mini-Wheats cereal and cookies.

In Japan, the Asia's biggest wheat importer, companies such as Yamazaki Baking Co, the number one bread and pastry maker, are passing costs to consumers as the government charges more for the grain.

The Ministry of Agriculture, Forestry and Fisheries said on February 15 prices would rise at an average 30 per cent in April, the biggest increase since 1973.

Demand outpaces crops
Global wheat production for the marketing year through May will probably reach 603 million tonnes as consumption rises to 619 million tonnes, according to the USDA. Demand in India, the most- populous nation after China, is up 16 per cent since 2001.

The US is the exporter of last resort as Russia, the third-biggest exporter, and Argentina, the fourth-largest, keep more for themselves. So far this marketing year, the US shipments have doubled to Egypt, Iraq and Indonesia, and tripled to the European Union, USDA data show. Pakistan, which imported nothing from the US last year, purchased 150,000 tonnes.

"There is not enough high-protein wheat to go around, and the last thing a wealthy nation or a centrally planned economy wants to do is run out of wheat,'' said William Tierney, executive vice president for John Stewart & Associates, a commodity consultant in Washington.

Goldman didn't change its one-year price projection this month, maintaining that wheat will drop to $8.50 a bushel as production increases.

Kansas crop
Last autumn, US wheat plantings rose 3.6 per cent, falling short of Goldman's 10 per cent forecast, because some Kansas land was occupied by summer-sown sorghum and soybeans. Those crops substituted for the previous year's wheat, which was lost in a devastating April freeze.

"Eventually, high prices will motivate more supply,'' Goldman's Zhang said.

A shortage of higher-protein varieties has been extra expensive for bakers such as Pechters Baking in Harrison, New Jersey. On the Minneapolis Grain Exchange, which trades protein-rich spring wheat used for making bread, prices tripled in the past year and touched a record $16 a bushel on February 15.

"Our customers just don't believe how much our costs have gone up,'' said Pechters Vice-President Anthony Battaglia, who plans to raise a two-pound loaf to almost $3 from $2.47 by the end of March. "This industry has never had to move this quickly before and it is not structured to change pricing daily, like fruits and veggies do.''