World supplies of wheat are tightening but are nowhere near as small as they were in 2007-08. Much of the world’s wheat supplies, ruined by heavy rains, are not high-enough quality to be used in the milling industry. Over the past year, global wheat prices have surged by 40 percent, with milling quality wheat now priced near $9/bu.
Tight world supplies of milling quality wheat began with the spring 2010 Russian drought, which led to a ban on Russian wheat exports. Problems spilled over into harvests in Europe and Canada, where heavy rains cut into quality. The situation worsened when torrential rains flooded Australian wheat fields—in particular, the area of the country that produced the highest-quality wheat.
USDA’s latest World Supply and Demand Estimates (WASDE) show global wheat supplies for the 2010-11 crop year rose slightly in December, but much of the wheat that is stockpiled will be used for animal feed rather than human consumption.
Several key wheat-producing countries continue to have problems. USDA’s 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 United States, Canada, and Russia.
USDA put the world wheat carryout at 178 million tons, substantially higher than the 2007-08 carryout of 125 million tons. The stocks to use ratio is 30%. “Twenty to 30 percent is what you want,” says Brian Liedl, market analyst with Country Hedging, Saint 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 yesterday above $7.83, compared with the hard red winter wheat contract at more than $8.68, Kansas City, and the hard red spring wheat contract at nearly $8.94, Minneapolis.
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, 4 million more acres and a 10 percent increase compared with 2010. “What surprised people is there was a larger increase in soft wheat than hard wheat,” says Liedl. The milling industry uses hard wheat varieties.
Liedl attributes some of the increase in soft wheat varieties, which 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,” Liedl says, adding that the potential for sustained high prices through 2011 is significant.
A wheat crop is harvested somewhere in the world about every three months and the U.S. harvest of hard red winter wheat, which begins in May, will be closely monitored, particularly if 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, Winnipeg, expects Western Canada, where the bulk of Canada’s wheat is grown, to have 21 million acres in wheat this year, compared with 20 million acres last year. “Longer term, we’ll lose wheat acres to canola,” Townsend says.
Russia’s ban on wheat exports will also likely continue to support high wheat prices. To export, Russia needs to harvest 85-plus million metric tons of grains, which includes wheat, barley, rye, and corn. “Right now it doesn’t look like Russia will be the major exporter it has been,” Townsend says. And Russia’s growing livestock industry continues to require more grain.
“The burden has fallen on the United States 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.”
Due to the timing of the harvests, the United States stands to gain the most from current high wheat prices.