World Grain - August 2009 - 20

GRAINMARKETREVIEW
Indicative wheat export prices
U.S. No. 2 hard red winter, ordinary, FOB, Gulf
(in dollars per tonne)

Wheat
Market fundamentals play a key
role in recent price decline
by Melissa Alexander

Source: U.S. Department of Agriculture

Argentine wheat situation
(in 1,000 ha and tonnes)

Harvested area
Production

2008-09

2002-03

1996-97

1990-91

1984-85

1978-79

1972-73

1966-67

20,000
18,500
17,000
15,500
14,000
12,500
11,000
9,500
8,000
6,500
5,000
3,500
2,000

1960-61

June
Apr
Feb 2009
Dec
Oct
Aug
July 2008
May
Mar
Jan 2008
Nov
Sep
July 2007
May
Mar
Jan 2007
Nov
Sep
July 2006

After a big rally in May that saw export prices approach $300
a tonne, wheat markets slid back sharply over the next six weeks,
sinking as of mid-July to their lowest levels in two years. Although
investor sentiment toward commodities, equities and the economic
outlook once again spurred the price volatility, grain fundamentals
played a key role in the downturn.
During this period, wheat export values dipped by more than 20%,
fueled by harvest pressure in the U.S., a generally favorable outlook
for the global crop and prospects for ample wheat stocks. In its late
June report, the International Grains Council (IGC) projected 200910 global ending stocks at an eight-year high, while the U.S. Department of Agriculture (USDA) a few weeks later also forecast the
highest level of stocks in eight years, in terms of both tonnage and
stocks relative to use.
It its report, the USDA projected 2009-10 world wheat production
at 656.5 million tonnes. Even though that figure would be 4% less
than the 682 million tonnes harvested in 2008-09, it still would be the
second largest crop on record.
As for global wheat demand, the USDA forecast 2009-10 world
wheat consumption at a record high 642.6 million tonnes, about 1%
higher than the previous record of 636.2 million set last season. But
with consumption lagging output for the second straight season,
stocks at the end of 2009-10 should expand to 181.3 million tonnes,
compared with 167.4 million at the end of 2008-09, with the stocksto-use ratio rising to the eight-year high of 28.4%.
Among key wheat suppliers, Australia's crop is forecast to increase
by about 7% as the worst drought in many decades continued to ease.
But Canada and the E.U. should post year-on-year harvest declines
of 18% and 11%, respectively, based on various weather problems
during the growing season.
In the U.S., the winter wheat harvest moved into high gear in late
June, and despite awful results in the southern Plains, the Kansas
hard red winter wheat crop came in well above expectations, in terms
of both quantity and quality. Consequently, the USDA in July raised
its U.S. wheat crop estimate to 57.5 million tonnes, down 15% from
the 2008-09 crop, but 5% higher than earlier projections.
Although Argentina should see a slight year-on-year increase in
wheat production, the country will fall far short of its typical output. From 1998-99 through 2007-08, Argentina produced an average
wheat crop of 15.3 million tonnes a year. The 2008-09 crop plummeted to 8.4 million tonnes, while the 2009-10 crop should increase
to only 9.5 million.
Extreme weather conditions, including drought and cold temperatures, account for some of the staggering decline from average in

475
450
425
400
375
350
325
300
275
250
225
200
175
150

Source: U.S. Department of Agriculture

the past two seasons, but more significant is the drop in Argentine
area planted to wheat. The IGC and the USDA estimate wheat area
for 2009-10 will be in the range of a scant 3 million to 3.5 million
hectares, the smallest since 1951.
Argentine area historically planted to wheat has shifted to other
more profitable crops, particularly soybeans. The USDA noted a
major impetus for falling wheat production might be the government's habit of unexpectedly imposing export restrictions and taxes
on wheat.
Those actions have created uncertainty for farmers, jeopardized
export sales and cut into wheat profitability. They also may have encouraged a shift to crops less affected by government intervention,
the USDA said.
The IGC and the USDA both project a decline in world wheat trade
during the 2009-10 season, with their forecasts dropping by 10% and
11%, respectively, from the previous season. But that decline comes
after wheat trade set a record high in the 2008-09 marketing year just
ended, spurred by drought in the Middle East that led the region to
more than double its wheat imports.
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