Analyst: Wheat Market Factors to Watch in 2010

January 11, 2010 06:32 AM


By Chad Weigand, Market Analyst, U.S. Wheat Associates 
The new year marks an end to a lackluster 2009 as a combination of abundant supplies and a global recession changed the dynamics of global wheat trade. It also marks the beginning of new challenges to come. Here are some factors that deserve attention in 2010. 
Wheat Production
Global production in 2009/10 reached an estimated 674 million metric tons (MMT), second only to 682 MMT in 2008/09. Two consecutive years of ample production fueled a rebound in the stocks-to-use ratio to 30 percent, its highest level since 2001/02. 
With the largest global supply in history, along with an 11 percent price drop on the year, world production will likely fall in 2010. Preliminary forecasts expect a 3 percent drop in total U.S. planted area, but SRW plantings are down by up to 15 percent and the global durum oversupply may lead to lower plantings. Soil moisture was generally favorable for U.S. winter wheat but the crop has a long way to go and concerns about winterkill are growing.
While Argentina is still feeling the effects of drought and export taxes, the government has recently discussed tax rebates for wheat producers that could affect Argentine plantings this summer. Ukraine planted more winter wheat this winter, but is expecting lower yields from dry, cold conditions. 
Convergence in CBOT Wheat Contracts
Despite actions by the Commodity Futures Trading Commission (CFTC) and the CME Group, convergence (the narrowing spread between cash and futures prices) in the Chicago Board of Trade wheat contracts remains problematic. Beginning with the July 2010 contract, CME will implement variable storage rates in an effort to encourage traders to release grain on the market. The problem demands solutions that will increase the effectiveness of the futures market as a hedging tool and increase SRW competitiveness in the world market. 
Economic Recovery and the Dollar
After a sharp appreciation in late 2008 and early 2009, the U.S. dollar value has declined 5 percent. A weaker dollar increases U.S. export competitiveness, and the current consensus among analysts is that low interest rates and government budget deficits, both of which contribute to a weaker dollar, are likely to continue well into 2010. Wheat traders will have to monitor the recovery process and the impact it may have on the dollar and wheat prices closely
Increased Russian Investment
Russia formed the state-controlled United Grain Company in 2009 with the intention of increasing grain production and infrastructure. Russia, currently the world's fifth largest grain producer, has significant upside production potential but lacks the logistical capacity to accommodate a larger crop. The overall economic climate is likely to make it difficult to accomplish such a goal in the near future, and there is a gap between the high prices at which the government purchased wheat and current market prices.
Energy Policy
The U.S. Environmental Protection Agency will decide in mid-2010 whether it will increase ethanol blend mandates in gasoline. Such an increase could once again spark demand for ethanol and support corn prices as it did in 2008. During 2009, the spread between wheat and corn prices fell to a low of $1.27, the lowest point in over a year. Increased demand for ethanol could bring this spread even closer in 2010.

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