Wheat stocks may hit 25-yr low

Global wheat stocks are anticipated to shrink to their lowest levels in 25 years by the end of the July-June season in 2007-08.

This will tighten the export supplies in the international market and keep the prices high and volatile. And with rising freight costs, the volume of global wheat is likely to lessen along with per capita consumption of the crop.

These findings are part of the latest report on crop prospects and food situation released by the UN Food and Agriculture Organisation (FAO) last week. However, the report foresees the area planted under winter wheat for harvest in 2008 to increase sharply in response to high prices.

The FAO estimated the wheat production in 2007-08 at 605 million tonnes, lesser than earlier expectations, but still about 1.7 per cent above the previous year's level of 595 million tonnes.

The lowering of projections is chiefly attributed to the deterioration of production in several key wheat producing countries, including those in Europe that have reported a 2.9 per cent output shortfall.

In Canada, the crop planted on relatively reduced acreage was struck by hot and dry conditions. Wheat outlook for Australia has also deteriorated significantly because of hot and dry weather in the country's major wheat growing belt.

As a result, global wheat stocks are projected to drop to 143.2 million tonnes by the end of 2007-08, some 9 per cent below 157.6 million tonnes recorded in the previous year. This is the lowest wheat stock holding since 1982, the report points out.

Significantly, most of the inventory contraction is in major exporting countries, notably in the USA and also in Australia, Canada and the European Union, where stocks are forecast to hit a 10-year low of just 11 million tonnes. But, some countries are also likely to increase their inventories thanks to larger domestic harvests, mostly India and China.

World trade in wheat in 2007-08 is forecast by the FAO at 109 million tonnes, down 4.6 million tonnes from the revised estimates of 113.6 million tonnes for 2006-07.

"Most of the reduction is anticipated in Asia, mainly in India. In 2006-07, India imported 6.7 million tonnes of wheat as its reserves were depleted. However, with higher international prices and a significant improvement in domestic production, India's wheat purchases from world markets are foreseen to drop," the report states.

Export supplies are tight because of lower output in Canada and deteriorating crop prospects in Australia. The EU, faced with the tight market and high domestic prices, is likely to keep its wheat sales well below the historical average.

Only the US is expected to boost its wheat exports this season by at least 4 million tonnes to 29 million tonnes thanks to higher domestic production and the weakness of the dollar, which has improved the competitiveness of the US wheat. In fact, the US is already reported to have sold about 70 per cent of the total projected exports.

The tight global export supplies and high prices are likely to adversely affect wheat consumption. The total wheat consumption is projected to grow this year by just 0.8 per cent, which is below the population growth.

Thus, the annual per capital consumption of wheat would decline from an estimated 70 kg in 2006-07 to 67.6 kg in 2007-08. This would, of course, push up the intake of rice and coarse cereals by about 1.4 per cent. The international prices of wheat began soaring from June to touch the all-time high by September.

The underlying factors for the price rise include low wheat stocks and repeated downward revisions of the anticipated production in major exporting countries, most notably Australia and the Europe.

In September, the US hard wheat (HRW, No 2, f.o.b.) averaged $343 a tonne. This is about $93 a tonne higher than the prices in July and as much as 65 per cent above the already high level of September 2006.

Recent weeks have witnessed even higher increases in wheat export prices in most exporting countries, including Argentina, Australia and the EU. Wheat futures prices for December delivery on the Chicago Board of Trade (CBOT) maintained an upward trend since April and hit a new record in September.

"Wheat prices remain highly vulnerable to the prevailing tight situation in the markets and are, therefore, likely to stay volatile. Any unfavourable developments regarding production prospects in the southern hemisphere or policy changes that may result in restricting export supplies, such as the recent exports restrictions in Ukraine, could send wheat prices even further above the recent highs," the FAO report maintains.

However, the only silver lining is that the high prices are likely to encourage wheat growers to increase the acreage in the new planting season. In fact, wheat sowing has already begun in many countries in the northern hemisphere.

The sowing conditions in the US are described to be favourable. Though the sowing got off to a slower-than-normal start, early indications point to the likelihood of a record area.

In Europe, too, wheat acreage is anticipated to increase substantially as the EU has removed the requirement of keeping 10 per cent land un-cropped.

This would bring about 3 million hectares of arable land back into production this season. In Asian countries, including India, wheat area is likely to rise in anticipation of higher returns.