|Global Market Analysis|
International wheat prices fall
Good crop forecasts have kept wheat prices worldwide under downward pressure from the beginning of the season and when 2008 production estimates, pointing to a new world record, became firmer, prices started to fall significantly. Confirmation of large export supplies is the removal of world-wide export restrictions, which accelerated the price slide. In recent weeks, prices were also influenced by developments in the financial markets and growing worries over a possible economic slowdown that might depress demand. In October, most wheat export prices were nearly 50 percent below their peaks in March 2008. The benchmark United States' wheat (No.2 Hard Red Winter, f.o.b. Gulf) averaged USD 252 per tonne in October, nearly 30 percent down from the start of the season and lowest since July 2007. By the end of October, the March wheat futures contract at the Chicago Board of Trade (CBOT) closed at USD 205 per tonne, down 33 percent (USD 100 per tonne) from the same period last year. Futures have lost nearly 60 percent since reaching their record highs in March 2008.
Table 2. World wheat market at a glance
* Jan-Oct 2008
Derived from IGC Wheat Index
Wheat production prospects for 2008 remain good
FAO’s latest forecast for world wheat output in 2008 stands at 677 million tonnes, a very substantial (11 percent) increase from the previous year. Accounting for a large part of this year’s strong growth have been the major producing countries in Europe, where latest estimates now point to a significant (25 percent) increase in production in 2008 following larger plantings and generally above-average yields. The gains compare with the previous year are particularly notable in eastern parts, after drought-reduced crops in 2007. However, also in North America, favourable weather led to better to yields in the United States and Canada, and significantly larger outputs are estimated in both countries. By contrast, aggregate 2008 wheat output in Asia could slip back somewhat from last year’s record as persisting dry weather reduced yields, especially in the Near East subregion, in Turkey and the Islamic Republic of Iran. Elsewhere in the northern hemisphere, aggregate output in North Africa recovered significantly from last year’s drought-reduced level.
In the southern hemisphere, the bulk of the major 2008 wheat crops will be harvested between October and the end of the year. In South America, unfavourable weather conditions continue to afflict some major producing areas of Argentina, after plantings were already reduced by drought. As a result, the country’s wheat crop is now forecast to be 25 percent smaller than last year’s good level. By contrast the outlook remains favourable in Brazil. In Oceania, prospects for the wheat crop in Australia have deteriorated somewhat over the past two months because of dry weather. Nevertheless, this year’s output is still set to recover sharply from last year’s drought-reduced level.
In many parts of the northern hemisphere the winter wheat crops for harvest in 2009 are already being sown. Although planting conditions are generally favourable, early indications point to smaller wheat areas. In the United States, as of mid-October, the winter wheat planting was reported to be progressing normally under favourable conditions, but the final area sown is expected to decline in response to reduced price expectations, combined with the increasing cost of inputs. In Europe, early forecasts point to a decline of about 2 percent in the European Union’s wheat area, even though the compulsory land set-aside has not been reintroduced for 2009/10 (it was reduced to 0 percent for the 2007/08 season). As in the United States, European Union farmers are also being influenced by the deteriorating price outlook for 2009, while their margins keep being squeezed by high input costs, especially for fertilizers.
Record world wheat trade in 2008/09
International wheat trade (exports) in 2008/09 (July/June) is forecast to reach 119 million tonnes, up 7 percent, or nearly 8 million tonnes, from 2007/08. Behind the global expansion are rising wheat imports by Asia, currently forecast at 57 million tonnes, or 10 million tonnes up from the previous season. This anticipated sharp increase in imports is mostly on account of significant crop reductions in several countries in the continent, most notably the Islamic Republic of Iran, where this year’s production could shrink by more than one-third because of severe drought. As a result, the country is expected to turn into a leading world importer for the first time, purchasing a decade high 6 million tonnes in 2008/09, after many years of near self-sufficiency. Other countries in Asia where wheat imports this season may also increase sharply include Afghanistan, Bangladesh, Pakistan and the SyrianArabRepublic. In addition, Indonesia is expected to take advantage of the lower world prices to import more, while competitive world prices of feed wheat are likely to boost imports by the Republic of Korea. Saudi Arabia, traditionally self-sufficient in wheat, is forecast to purchase a sizable volume from world markets this season. The expectation follows a decline in the country’s production, partly driven by a recent change in Government policy to gradually phase out its support to wheat production due to water scarcity.
In Africa, aggregate wheat imports in 2008/09 are set to hover around 30 million tonnes, close to the peak reached in 2007/08. Following a recovery in production, imports by Morocco may decrease by at least 500 000 tonnes from the previous season’s high. Smaller imports are also forecast for Ethiopia, because of larger domestic production. However, strong consumer demand is expected to boost purchases by Nigeria and Libya. Africa’s largest importer, Egypt, is set to import nearly as much as it did in 2007/08. In Latin America and the Caribbean, wheat deliveries to Brazil are forecast to decline, in response to an increase in domestic production, while they may be maintained in Mexico, despite higher production to allow for a replenishment of the country’s relatively low stocks. In Europe, imports by the European Union are forecast to fall sharply, as output recovers strongly. The European Union improved wheat supply situation has resulted in a significant fall in domestic prices, prompting the European Commission to consider reinstating the import duty on cereals. Tariffs were suspended during the 2007/08 marketing season in an attempt to check rising domestic prices.
In contrast to the previous season, the forecast growth in world wheat import demand in 2008/09 will not be a major concern for markets, because of the anticipated strong recovery in export supplies. Much larger exports compared with the previous season are forecast for theRussian Federation and Ukraine, offsetting a reduction in Kazakhstan. The largest increase in wheat exports over 2008/09 is forecast for Ukraine, where shipments could exceed 8 million tonnes, compared with barely 1 million tonnes in the previous season. All the leading wheat exporting countries in CIS have lifted the restrictions on exports that were put in place in response to high domestic prices last season. Among the major exporters, Australia and the European Union are also forecast to ship significantly more wheat. While sales from Canada are likely to match the previous season’s level, in the United States, they are forecast to decline in spite of an increase in domestic production. The cut will be caused by a larger domestic use of wheat for feed and relatively low domestic availability owing to a depleted level of carry-in stocks from the previous season. Exports from Argentina are also forecast to decline, given prospects for lower production amidst prolonged dry weather conditions.
Wheat utilization in 2008/09 to expand on higher food and feed use
The increase in production in 2008, combined with lower prices, should lead to a significant boost in wheat utilization in 2008/09, now forecast to reach 643 million tonnes, up almost 5 percent from 2007/08. This sharp expansion follows two consecutive seasons of small contractions, largely in response to reduced supplies and pervasive rises in prices.
Total wheat feed utilization is forecast to jump by a staggering 19 percent, to 120 million tonnes. Of these, nearly 101 million tonnes are to be used in the developed countries – up from 84 million tonnes in 2007/08, sustained, in particular, by significant expansions in the United States and in the European Union. In the United States, the anticipated reduction in maize production is set to encourage larger wheat usage in the feed sector. Similarly, the recovery in wheat production in the European Union could boost its utilization as a feed ingredient, to replace coarse grains, which had to be imported in record volumes last season. The European Union has traditionally been the world's largest market for feed wheat and over 40 percent of its domestic production is normally destined for animal feed.
World food consumption of wheat in 2008/09 is forecast to rise by 1 percent, to 451 million tonnes. Developing countries look set to absorb much of the increase, consuming in aggregate 318 million tonnes, 1.2 percent more than last year. The general improvement in local supplies together with lower world prices are the main reasons for the increase, particularly among countries situated in Africa and in Asia. Total wheat consumption in the Low Income Food Deficit Countries (LIFDC), as a group, is forecast to grow by 1.3 percent from 2007/08 to 248 million tonnes. On a per caput basis, world wheat consumption should remain steady at around 68 kg per annum - around 60 kg in the developing countries.
Significant improvement in the level of world wheat stocks
World wheat stocks by the close of the crop seasons in 2009 are forecast to approach 187 million tonnes, up 31 million tonnes, or 20 percent, from their 30-year low opening levels. In spite of the strong growth in global wheat utilization, the increase in production in 2008 is likely to allow for an overall replenishment of world wheat reserves. As a result, the world wheat stocks-to-use ratio is also forecast to recover from the previous season’s low. For 2008/09, the ratio is expected to rise to 29.5 percent, five percentage points more than in the previous season and only slightly below the 2000 -2005 average.
Aggregate stocks held by major wheat exporters are forecast in the order of 45 million tonnes, up 18 million tonnes, or 66 percent, from the previous season. Although still below the level in 2005/06, the strong recovery in wheat inventories in major exporting countries mostly reflects bumper crops in North America and European Union, as well as from a modest production recovery in Australia. At the current forecast level, the ratio of the major exporters' stocks-to-disappearance ratio (defined as their anticipated exports plus domestic consumption) is expected to rebound from a historical low of around 11 percent in the previous season to 16.7 percent this season. The largest increase in stocks is forecast for the United States (up 8 million tonnes), the European Union (up 7.5 million tonnes) and Canada (up 2 million tonnes).
In addition to the major exporters, larger inventories are also anticipated in many other countries. High prices encouraged plantings which, combined with favourable weather, boosted production in several countries, enabling them to reconstitute stocks. The most significant increases are forecast for China1, Brazil, India, the Russian Federation and Ukraine. Among them, ending stocks in Chinaare forecast to increase the most, by 8 million tonnes, to reach their highest levels since 2002/03. In India, the Government announced in September that its reserve stocks were in excess of the amount targeted, after it had already purchased over 23 million tonnes of wheat from farmers. The Government plans to release an additional 200 000 tonnes of wheat to the Public Distribution Scheme on a monthly basis until the end of the year. This year’s ample production in Ukraineand the Russian Federation will also boost carryovers in both countries, particularly in view of the domestic transport problems, such as shortages of rail wagons, which stand as the main constraint to export expansion in both countries.
1. All subsequent references to China also refer to Mainland China, unless otherwise stated.
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