|††Global Market Analysis|
While international wheat prices continued on an upward trend during most of the 2005/06 marketing season, the price increase has accelerated since the beginning of the current season as production prospects deteriorated, especially in several wheat exporting countries. By October 2006, concerns about the prospects for wheat crops in major producing countries in the southern hemisphere, (especially drought-devastated Australia), added further strength to prices, while the announcement by Ukraine to limit exports through quotas also provided support. The volatile but rising prices in October 2006 were followed by more subdued price movements in early November 2006, before rising again towards the end of the month. In November, the United States hard wheat export price averaged US$219, up over US$52, or 31†percent, from the previous year. The rise in the United States export prices was also supported by the sudden recent weakening of the United StatesDollar. Stronger upward price movements were also recorded for Argentine Trigo Pan and the United States and European Union soft varieties. Rising world prices have boosted sales from the European Unionin spite of a strong Euro and in the absence of export refunds.
Price developments in the futures market have been supported not only by the wheat marketís own fundamentals but also by a continuing rally in maize prices and heavy purchases by hedge funds. By late November 2006, the Chicago Board of Trade (CBOT) March contracts for soft red winter wheat resumed their upward trend and reached US$191 per tonne, up US$73 per tonne, or 62†percent from 2005.
Notwithstanding the current tight market situation, FAO is expecting international wheat prices to return to more moderate levels. Once the market gets past the present uncertainties associated with the short-term supply outlook and crop prospects in southern hemisphere countries, focus will shift to the new crops in the northern hemisphere. The sharp increase in winter plantings and good growing conditions have raised expectations for a strong rebound in 2007 harvests. As a result, wheat prices could be subject to more persistent downward pressure later in the season as supply prospects gradually improve.
Table 1. World wheat market at a glance
As of mid-November, with the main wheat harvests in the northern hemisphere already complete and those in the south soon to be concluded, FAOís latest forecast of world output in 2006 stands at roughly 592†million tonnes, almost 33†million†tonnes, or 5.3†percent, down from 2005 and below the average of the past five years. This level is well short of expectations earlier in the year, following downward revisions for several regions.
In Europe, hot and dry summer weather affected yields in several major producing European Unioncountries, turning prospects around and leading to an estimated 5†percent reduction in their aggregate output in 2006. In the southern hemisphere, a rapid deterioration in production prospects since September has called for large downward revisions there also, compared with expectations at the start of the seasons. Favourable early prospects in Australia were gradually eroded as severe drought set in across much of the country during the growing period, and with the harvest now underway, the final output is forecast at just 44†percent of the average of the past five years. In South America, a period of drought in Argentina reduced yield prospects, and although the harvest is still expected to better 2005ís low level, the improvement will not be as much as projected earlier and output will remain below the five-year average. In Brazil, financial constraints on producers were largely responsible for a sharp fall in plantings, which, combined with adverse weather, could lead to a 50†percent smaller crop in 2006.
However, as forecast earlier in 2006, much of the decline in aggregate 2006 world wheat production is due to smaller harvests now completed and confirmed in some major northern hemisphere producers. This applies in particular to the Russian Federation, Ukraine and United States, where adverse weather conditions at the start of the season affected planted areas and impaired early crop development.
At the regional level, increased wheat outputs in 2006 are estimated only for Asia and Africa. In Asia, aggregate production is set to be up by nearly 3†percent, mostly reflecting larger crops in China, India and Kazakhstan. In North Africa, weather conditions during the 2006 season were much more favourable than in the previous year and supported a strong recovery in output.
Early prospects for the newly-planted 2007 winter wheat crop are generally favourable. Conditions for planting and crop establishment have been good and current indications point to larger areas in several major producing countries. In the United States, the winter wheat planting was virtually complete by mid-November under favourable conditions and tentative estimates point to a 5†percent expansion in area. Also in Europe, the wheat area is expected to be up in several of the major producing countries throughout the region.
World trade in wheat in 2006/07 is currently forecast at 110†million tonnes, unchanged from the previous season and slightly below FAOís last forecast reported in the October 2006 issue of the Crop Prospects and Food Situation Report. The decline in this monthís forecast is mostly a reflection of further cuts in commercial imports by several countries, mostly in reaction to higher world prices. This has been the case of Nigeria, the second largest importing country in Africa after Egypt, which was initially forecast to purchase more wheat this season but is now more likely to purchase less. Iraq is another country where total imports are likely to decrease rather than rise, given the slower pace in securing contracts and in actual deliveries. Strong international prices, high freight rates for Iraqi ports and the continuing turmoil on the domestic front have added uncertainty to the prospects for higher imports by Iraq this season. In spite of lower imports by many countries, world trade in 2006/07 is still expected to be the second largest, just one†million tonnes below the record in 2004/05. The reason is a sudden surge in imports by only a few countries, most notably Brazil and India, without which world trade would have instead taken a sharp dive.
If the current forecasts materialize, imports by Brazil and India in 2006/07 alone would add up to around 14†million tonnes. In the case of Brazil, the expected halving of its production in 2006 combined with strong and growing domestic demand have raised its import demand to be at least 7.8†million tonnes, well beyond its average imports of roughly 5†million tonnes, which Brazil normally purchases from Argentina, its principal Southern Common Market or Mercosur partner. Given the tight exportable supplies in Argentina, Brazil could be seeking wheat outside the Mercosur trade block, although that would mean higher import costs because of the applied 10†percent tariff on purchases from countries outside Mercosur.
In the case of India, this seasonís expected large imports come as a surprise to world markets given the fact that India has become increasingly known as a self-sufficient country in recent years with even occasional large surpluses for exports. However, with consumption rising faster than production and depleted public stocks, the Government decided to contract large imports to avert price increases. Since the start of the season, the Government has purchased some 5.5†million tonnes and in September†2006 suspended the remaining small import duty on wheat until the end of December 2006, in an effort to encourage imports by private millers. At the time of suspension, the import duty had already been reduced from 50 to 5†percent in late June 2006.
As for major developments in other markets, the forecast for wheat imports by the Islamic Republic of Iran has been raised to 900†000† tonnes in spite of yet another year of record crop. This follows an upward revision to the estimate of the previous seasonís imports, following the recent confirmation by the Government that an amount of 1.2†million tonnes was imported in the 2005/06 for the purpose of replenishing the countryís strategic reserves. In contrast, wheat imports are forecast to decline in several countries. In Pakistan, a bumper harvest has reduced the need for large imports and the country is reported to be considering some exports this season. Most countries in northern Africa also benefited from good to bumper crops in 2006 and this has driven down their imports considerably, especially in Morocco where production has almost doubled from 2005 and imports are forecast at one†million tonnes, down 1.8†million tonnes from the previous season and smallest since the mid-1990s.
The large anticipated imports by Brazil and India constitute one of the emerging features of this seasonís trade. The other is the supply tightness triggered by smaller harvests in several wheat exporting countries. Among the top five major exporters, individual shipments from all but Australia are likely to remain close to, or even increase from, the previous season but this would be mainly at the expense of some heavy draw downs of their inventories. In Australia, given the forecasts for a sharp reduction in wheat output, exports (July/June) are forecast to decline by some 1.5†million tonnes while ending stocks would also have to be depleted. A tight domestic situation is also expected to emerge in Argentina. Although its exports during the current marketing season are likely to increase, according to trade sources, it is unprecedented that the country already committed the expected export availability from the new crop. This contrasts with the situation in Canada where the 2006 good level and high quality production have created a more favourable condition for exports, which are likely to exceed 20†million tonnes, the highest level in almost ten years. Wheat exports from the European Unionare also forecast to increase, approaching a four-year high of around 15.5†million tonnes. While wheat production also fell sharply in the European Union in 2006, its large carry-over stocks and good export prospects supported by high world prices have given way to a much faster pace in its sales this season without the need to resort to export subsidies; no restitutions have been granted since mid-July.
The anticipated increase in aggregate wheat sales by the five major exporters would cover the expected sharp decline in shipments from other sources. Several exporters suffered from reduced harvests this season and this is expected to weigh heavily on their export potential. In Ukraine, a critical situation has developed due to a major trade policy change by the Government. Ukraine exported 6.5†million tonnes of wheat in 2005/06 but its exports this season may not exceed half that amount and this is not only due to a sharp decline in production but also because of a much slower pace in sales following the Governmentís decision in late September 2006 to introduce wheat export licensing and export quotas (400 000 tonnes of wheat) for the rest of the year. The objective has been to stabilize domestic prices but, in effect, it has brought all shipments from Ukraine to a halt as no licenses have been issued since October. Based on the latest indications, the Government is considering the extension of the export restriction beyond 2006 to cover also the rest of the 2006/07 marketing season.
Total wheat utilization in 2006/07 is forecast to approach 622†million tonnes, which is 1.5†million tonnes below the previous season. This decline comes against a backdrop of two consecutive years of strong growth when weaker prices contributed to larger use of low quality wheat for animal feed. A combination of smaller production and higher prices is likely to dampen growth in total wheat usage this season. Total feed use is forecast at 112†million tonnes, a drop of one†million tonnes from the previous season, most of which is occurring in major wheat exporting countries, especially in the United States given this seasonís exceptionally tight domestic condition. Food use of wheat, which constitutes the bulk of total wheat utilization, is forecast to reach 446†million tonnes, up roughly one†percent. At this level, world per caput consumption of wheat would remain at the previous seasonís level of roughly 68kg.
The production short-falls in 2006 in many parts of the world are expected to result in a large draw down of world wheat inventories to their lowest level since the early 1980s. Global wheat stocks for crop years ending in 2007 are currently forecast to fall to around 147†million tonnes, nearly 28†million tonnes, or 16†percent, below their opening levels. At this level, and in spite of an expected slowdown in utilization growth, the world stocks-to-use ratio for wheat is forecast at around 23†percent. This represents a 5†percentage point drop from the previous season and the lowest ratio for at least 30 years. Most significant reductions are expected among major exporters with their combined inventories shrinking to just over 34†million tonnes, the lowest level in ten years. In the United States, ending stocks are likely to fall by more than 4†million to around 11†million tonnes, while in Australia and the European Union, wheat stocks are expected to decline by at least 7†million tonnes each. Smaller inventories are also forecast for Canada. Nonetheless, as a further sign of the supply tightening in world markets, the anticipated overall decline in wheat stocks held by the major exporters would result in the ratio of their combined stocks-to-disappearance (defined as domestic utilization plus export) to reach a low of only 14†percent, more than a 6†percentage point below the long-term trend.
Elsewhere, most CIS countries will also face a tighter stock situation, especially Ukraine where stocks are expected to fall by at least one†million tonnes. In contrast, ending stocks in India may increase by at least 2†million tonnes following large imports this season. In China, where wheat production in 2006 is reported to have reached the highest level in seven years, wheat stocks are forecast to stabilize at the previous seasonís levels of around 46†million tonnes in spite of lower imports and also some increase in exports because of favourable prices in world markets. In an effort to raise farmersí income, the state-owned warehouses in the major wheat growing areas of China were instructed to purchase wheat from farmers between June and September at minimum guaranteed prices. The set prices were above the market rates and this policy therefore contributed to exceptionally large sales by farmers to public warehouses during the early months of this season.
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