The heady days of high wheat prices could soon be history.
The world is not short wheat, said ProFarmer Canada market analyst Mike Jubinville in an interview Nov. 17. There is as much wheat in the world today as there has ever been in human history.
World wheat ending stocks are projected to be 202.6 million tonnes equal to carryovers seen in the 1999 to 2001 era when wheat prices were under $4 a bushel. Meanwhile, the world is expected to produce a huge crop of 680 million tonnes of wheat in 2012-13.
Jubinville, who notes wheat prices are still relatively strong, isn t predicting they re going to fall to 1999 levels in the near future. However, prices have been trending lower and unless a major wheat producer runs into production problems in 2012-13, prices could continue to weaken, he said.
Canadian Wheat Board market analyst Neil Townsend has been bearish about wheat for weeks. In his Nov. 16 PRO (Pool Return Outlook) Updater, Townsend confesses to second guessing his pessimism until consulting with others in the grain trade.
All signs point towards a further lengthening in world wheat stocks, without significant weather-related production issues in one or more major wheat-exporting or -importing countries, he wrote. Outside of that, as long as weather patterns remain more or less neutral, the end of the bull market will happen in 2012-13. Of course, we have to get there first and the last two-thirds of the 2011-12 marketing year should also see a significant reduction in futures prices.
Some Canadian farmers have said they ll hold their wheat and sell it for higher prices in the open market federal legislation promises for Aug. 1, 2012.
I would say it s a low percentage bet on what we see today, Jubinville said. For me it s a complete gamble to do this. I don t say that it s necessarily wrong.
Having sold a third of his virtual crop through the wheat board s fixed contract, Jubinville said he planned on leaving the rest in the pool. Now he s not so sure.
Maybe we should be using old-crop wheat board marketing programs like fixed-price or early-payment options if we think this market is still going down further.
Last year s Russian drought the worst in at least 50 years followed by a ban on Russian grain exports, helped push world wheat prices to near-record levels.
This crop year Russia is expected to export up to 25 million tonnes of grain, including wheat 17 million tonnes of it by the end of December.
Ukraine says it will export a record 27 million tonnes of grain in the 2011-12 season, as reported by Reuters. Only a fifth of that has been shipped so far.
The Former Soviet Union (FSU) countries of Russia, Ukraine and Kazakhstan will account for 25 per cent of world wheat exports this crop year, placing them collectively as the world s No. 2 wheat exporter behind the United States, Jubinville said.
They always undercut everybody but what happened last year is we eliminated the lowest-cost provider, he said. So we reshuffled the demand matrix amongst the traditional exporters and we saw a big bump in the futures market. Now they re back and they re undercutting the market again.
Australian wheat production is also on the rise following droughts that have limited production in parts of the country the last couple of years.
As of Sept. 30, Australian wheat exports were up 36 per cent from last year to 18.6 million tonnes. A second straight bumper harvest theoretically means there s about 27 million tonnes of Australian wheat looking for markets in the current marketing year, although some will stay in storage. The government expects exports to hit 20.4 million tonnes, which would be a new record.
Lower shipping costs
Australian wheat exporters are counting on lower shipping costs and higher-quality grain to give them the upper hand in southeast Asian markets, allowing them to fend off aggressive competition from FSU suppliers. While wheat production has surged in the FSU and Australia, Canada has struggled because millions of acres were too wet to plant in 2011 and 2010.
These things go in cycles… and what kind of weather you ve had during the growing season, said Bruce Burnett, the wheat board s director of weather and market analysis.
Canada, traditionally among the world s major wheat suppliers, will fall behind the FSU and Australia because it has less to sell. But a year from now positions could be reversed.
Good quality helps Canada compete. This crop year more than three-quarters of the crop is expected to be graded No. 1 or 2, Burnett said. However, protein levels averaging 13.1 per cent are lower than usual.
There is going to be some fierce competition as the Australians harvest and as the Argentineans finish off their harvest, specifically on the lower-protein side of the market because those are two lower-protein-producing areas of the world, he said.
The United States has remained a bit of an island of high grain prices, Jubinville said. But there s evidence of arbitrage with confirmed reports of British feed wheat imported for livestock feeding because American corn and wheat prices are more expensive.