WHEAT MAY BE THE WILD CARD WINNER IN 2007 by Shailendra Kakani Managing Editor, CommodityResearch.In December 15, 2006
Want a winning investment for 2007? Well...then forget the advise of seasoned fund managers and CTAs, and follow the farmers of India. According to them, wheat is the commodity to watch during the coming year. Putting their money where their mouth is, they have upped their stake in wheat acreage this season, cumulatively sowing a whopping amount of land with wheat.
As a result, by the first week of December wheat sowing has crossed the 20 million hectares mark and touched a landmark 20.74 mha, a record 22.5 per cent more than the corresponding last year's area of 16.92 mha. The sowing area has increased across the board, gaining almost equally among all the major wheat-growing States.
Farmers are no commodity analysts but they are the primary stakeholders, and they have been prompted by the buoyant market prices. Wheat prices are up 67% in the past year, reaching $5.6 on October 17, the highest since 1996. In India the prices have been steadily strong, and have made the farmers in a state recently threaten to stop selling their stock at government-fixed prices, which are usually lower than those prevailing in the markets.
At the back of it all is a shortage in production and increase in consumption. FAO’s latest forecast of world wheat output in 2006 stands at roughly 592 million tonnes, almost 33 million tonnes, or 5.3 percent, down from 2005. Price rises have been supported by supply shortfalls due to setback in Australian wheat output as well as due to low global stocks.
Though FAO expects a turnaround, with increased winter plantings - as has been the case in India and elsewhere - and good growing conditions raising expectations for a strong rebound in 2007 harvests, at least the coming few months may witness wheat prices continue to rule firm. Reason enough why a report by J P Morgan Chase has been bullish on the grain. "Global wheat reserves will fall to 118.8 million tonnes on May 31, the lowest since 1982 because Australian production will drop 57% to 10.5 million tonnes and US output has declined 14%."
Leave aside wheat, other grain production is also a cause for worry. For example global production of coar se grains is lower by 2.1 per cent over last year, at 981 million tonnes. Maize output is lower by 2.2 per cent at 694 million tonnes. More than two billion people are used to consume coar se grains, and are likely to select either wheat or coar se grains depending upon various factors like availability and comparative price.
Similarly rice growth is predicted to be affected by the typhoons, drought, flooding, diseases and insect attack. Rice again is staple for more than two billion people, most of them in Asia, and any stress in supply will only spur them to consume wheat.
Although Indian Ministers have been shouting from the rooftops that there was no threat to country's food security, and that the available food grain stocks are much higher than the mandatory buffer norms, the fact is everybody in the trade knows about the ensuing shortages. India is estimated to import 6 million tonnes of wheat in 2006-07. The forex outgo for this, at an average price of $200/tonne, is Rs 5,300 crore.
India has already begun importing wheat, and according to informed sources there are problems even though the stocks have landed in India. There have been reports about contamination on account of the use of substandard packing, thus feeding the speculations that India was going to be a sustained customer in the global markets. And as the trend has been; the prices harden smartly any time India is a buyer.
India is forced to import substantial quantities of wheat since other grains' output is also markedly down. For example the production of corn, which is the third most important cereal crop in India after wheat and rice, has fallen from 12.4m tonnes to 11.5m tonnes this year, a significant reduction in the face of overall declining grain output.
While supply has fallen to 11m tonnes, demand is rising rapidly and pegged currently at 14m tonnes. Although the demand for corn in India comes mainly from the poultry, meat and dairy industries for use as animal feed, it is also consumed as regular food by people. In fact in many regions corn is the staple, not without reason; traditionally India is among the top 10 global producers of corn.
Globally corn has been one of the best performers on the commodity bourses this year. Corn prices have reached levels not seen for a decade, according to FAO’s latest Food Outlook report. Corn market fundamentals favour firm prices given buoyant demand by China for feed purposes and for bio-ethanol use in the US.
If industrial use, mainly for ethanol, continues to grow at the current pace, it may take more than one good crop season for prices to retreat significantly from their current highs, the report said.
But what about the increased acreage the farmers have managed to sow? The fact is there are many doubts if the wheat output will really match the increased acreage. The winter crop is often very fragile owing to the delicate weather and irrigation requirements. Besides, the 22.5% increased acreage is going to increase the demand for fertilisers, and right now all is not well in India's fertiliser industry. And then the consumption is on the rise. According to an expert, "Even if the country manages to produce 71-72 million tonnes of wheat (optimistic on current reckoning), there may be no escape from importing 4-5 million tonnes in 2007." And as I said before, the moment the international markets smell India's approach, the prices shoot up. It is as simple as that.
The long and the short: while petroleum may remain a more likely cause of international conflict than wheat - as claimed by Simone Weil - wheat may provide better bang for your buck in the immediate future.
