wheat prices go against the grain

Wheat prices go against the grain

Ray Brindal | November 15, 2008
Article from: Dow Jones Newswires

GLOBAL wheat prices have steadied in recent weeks after a steep two-month slide, but a rally is likely early next year.

Ad if production does not meet high expectations, the rally could be a sharp rise.

Against a backdrop of a general decline in the value of all asset classes, wheat prices slumped as the market focused on a sharp increase in global wheat production, with the US Department of Agriculture this week estimating a 12 per cent year-on-year increase in output in 2008-09 to a record 682 million tonnes.

The market may, however, have overlooked the fact that demand would continue to grow because the global population was expanding, said Mark Martin, a risk management adviser and director at Australian commodity manager MarketAg.

The USDA estimated demand for wheat would grow 6.2 per cent in 2008-09 to 657 million tonnes. "With that growth in demand and tight stocks, it wouldn't take too much for a production hiccup to cause a price explosion," Mr Martin said. Australia's most active wheat futures contract -- ASX January -- settled on Wednesday at $268 a tonne. That is up from a low of $258 in late October but well below a high of $392 on August 21 and an even higher peak of almost $450 in late February. "If we have a serious weather problem or a scare, you'd see a $200 lift in these prices," Mr Martin said.

He is not alone in seeing a solid floor in place for wheat prices. Commenting on the USDA estimates, Merrill Lynch said wheat, soy and corn inventories were expected to remain low in 2008-09 despite expectations of rising output.

Wheat stocks -- at their third-lowest level in 35 years -- should remain near record lows, it said. "With grain demand expected to grow at 3-4 per cent in the coming year, inventories at historically low levels and limited arable land available for expansion, grain markets are expected to remain tight in the near-to-mid term," Merrill Lynch analyst Mario Maia wrote. "We expect tight market conditions to support grain prices above historical levels."

The UN Food and Agriculture Organisation warned in its bi-annual "Food Outlook" report that a prolonged financial crisis could affect plantings of various crops globally, possibly leading to even larger price rises in farm commodities next year than the one earlier this year.