Due to the timing of harvests, the U.S. stands to gain the most from current wheat prices.
World supplies of wheat are dwindling—but they are nowhere near as tight as in 2007/08. Ruined by heavy rains, most of the wheat is not of high enough quality to be used in the milling industry. During the past year, global wheat prices have surged by 40%, with milling-quality wheat now priced near $9 per bushel.
Tight supplies of milling-quality wheat began with the spring 2010 drought in Russia, which led to a ban on Russian wheat exports. When harvest rolled around, heavy rains cut into quality, causing problems in Europe and Canada. The situation worsened when torrential rains flooded Australian wheat fields—in particular, the area of the country that produces the highest-quality wheat.
USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) report shows that global wheat supplies for the 2010/11 crop year rose slightly in December. However, much of the wheat that has been stockpiled will be used for animal feed, not human consumption.
Red flags. Several key wheat-producing countries continue to experience production problems. The WASDE report lowered Kazakhstan production by 1.3 million tons and Australian output by 500,000 tons from its previous estimate. Australia is the world’s fourth largest wheat exporter, behind the U.S., Canada and Russia.
USDA put the world wheat carry-out at 178 million tons, substantially higher than the 2007/08 carryout of 125 million tons. The stocks-to-use ratio is 30%.
"You want 20% to 30%," says Brian Liedl, market analyst with Country Hedging in St. Paul, Minn. "The world stock situation that is troubling is high-quality wheat."
The Chicago Board of Trade March soft red winter wheat contract closed above $7.83 on Jan. 13, compared with the hard red winter wheat contract in Kansas City at more than $8.68 and the hard red spring wheat contract in Minneapolis at nearly $8.94.
USDA’s Winter Wheat Seedings report, released Jan. 12, showed growers are expected to seed a
total of 41 million acres in 2011 to all wheat varieties, which is 4 million more acres and a 10% increase compared with 2010.
"What surprised people is that there was a larger increase in soft wheat than hard wheat," Liedl says. The milling industry uses hard wheat varieties.
Liedl attributes some of the increase in soft wheat varieties, which currently are in ample supply, to rotation schedules, but notes that in Kansas, Oklahoma and Texas, where hard red winter wheat is grown, the crop went dormant during very dry conditions. "That’s adding a lot of risk premium in the market," he says, adding that the potential for sustained high prices through 2011 is significant.
Three key harvests. A wheat crop is harvested somewhere in the world about every three months. The U.S. harvest of hard red winter wheat, which begins in May, will be closely monitored, particularly if the dry soil conditions that now cover much of Texas, Oklahoma and the eastern half of Kansas persist.
In Canada, the world’s second largest producer of milling-quality wheat, wheat acres are expected to increase slightly this year. Neil Townsend, market analyst with the Canadian Wheat Board in Winnipeg, Manitoba, expects Western Canada, where the bulk of the country’s wheat is grown, to have 21 million acres in wheat this year, compared with 20 million acres this past year. "Longer-term, we’ll lose wheat acres to canola," he says.
Russia’s ban on wheat exports will also likely continue to support high wheat prices. To export, Russia needs to harvest 85 million-plus metric tons of grains, including wheat, barley, rye and corn. "Right now, it doesn’t look like Russia will be the major exporter it has been," Townsend says. Russia’s growing livestock industry continues to require more grain.
"The burden has fallen on the U.S. to supply the world with wheat," Liedl says. "We can do it for one year, but anything beyond that is more than we are capable of."
- Mid-February 2011