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Bumper wheat supplies soothe food prices

posted Nov 1, 2011, 4:38 AM by Puneet Goyal
22 OCTOBER, 2011 21:58
Global worries about food price inflation should be receding as wheat supplies are plentiful. Warehouse stocks are at their highest in years, producers have been reporting bumper crops and prices are falling sharply.
Image: Picture: REUTERS
A woman labourer harvests rice at a paddy field on the outskirts of the western Indian city of Ahmedabad this week

"Signs are that by end of this season wheat stocks will be at levels not seen for a decade

In March 2008, the world's grain markets were in turmoil. Prices were pushing to record highs. Russia, India and Ukraine were restricting exports in the hope of restraining domestic prices to deflect feared civil unrest.

The restrictions ranged from bans to levies on exports. Importing nations suffered.

Times have changed. While the US and Australia remain reliable exporters with no restrictions, others are now re-entering the export markets to off-load what have been bumper harvests onto countries that are regular importers.

According to the IMF figures cited by market watcher Index Mundi, 10 years ago in September 2001, wheat was averaging $122 a metric ton. That was for the bellwether No.1 Hard Red Winter wheat FOB (free on board) Gulf of Mexico.

In mid- 2007 its price started to move sharply to peak just shy of $444/ton in March 2008. At the time, speculators were being blamed for the rise . But fundamentals could not be denied. After that peak, the price moved all over the place before settling into what is being described as a bear trend since May this year.

In May, US export wheat was priced at just over $354/ton on average. By September the average was just short of $316/ton and, currently spot prices are about $287/ton. But on the Chicago Mercantile Exchange (the former Chicago Board of Trade that sets the market for grain prices) wheat contracts for December delivery are somewhere in a region just south of $230/ton and less for March next year.

There are signs that the Chicago bears are getting cold feet, with their market antennae sensitive to reports of wheat disease in Poland, dry planting conditions in the US Great Plains and rains that have partly saved Argentina's drought-threatened crop.

On the supply side India, the world's third-largest wheat producer (after the EU and China) and whose governments are normally hypersensitive to domestic availability that might lift domestic prices, is back in the market as a net exporter.

In Kiev, the Ukrainian government has been dithering over scrapping export levies that make its wheat more attractively priced for export. There are reports that Egypt, the world's single largest importer, has been turning away from the US and towards Russia. Russia is matching bumper harvests with a vigorous export drive.

Australian exports have been hampered temporarily by rail transport bottlenecks in Queensland and Victoria, where coal trains have been taking precedence over grain so Australian stocks have been rising.

Perhaps as a result, China is increasing its wheat purchases from the US, partly offsetting America's market losses elsewhere.

All the signs are that by the end of this season global wheat stocks will be at levels not seen for a decade or more. And US stock levels are a major driver of trading on the influential grain futures markets of Chicago and Kansas City.

Short of some major wheat or other grain crop failures as we move into 2012, wheat prices seem more likely to be falling than rising for some time.