Thursday, December 23, 2010

Volatility increases in world wheat market

BOBBIE HINKLEY writes about the volatility in wheat markets published by Farm Weekly.

THERE is already a 25 million tonne deficit in the production of wheat under consumption demands globally.

That was the message from keynote speaker and vice president of overseas operations with grain traders, US Wheat Associates, Vince Peterson, when he discussed the conflict between long-term trends in world wheat production and consumption and examined global wheat decline over the last 30 years at last week's International Grains Conference.

Mr Peterson said the huge expansion of world plantings of more profitable crops, such as maize and oilseeds, over the past half century had come at the expense of the land area historically planted to wheat.

"This has produced competing and unsustainable trends looking into the future, as we look towards feeding the increasing world population as it grows from some 6.9 billion today and approaches 9.5b by mid-century," he said.

Mr Peterson questioned whether market forces should be left to dictate wheat production or whether doing that would only open the way for further price volatility.

The conversation surrounding global food security was started at the International Grains Council meeting in London in June and Mr Peterson believed long-term trends for the world wheat industry were headed in opposite directions.

One opposing factor was the wheat production land area and the other was wheat consumption trends around the world.

"We have to look at how those things come together on the path that we're on and we have to ask is that a pathway to stability in the marketplace or is that a pathway to increased and continued volatility?" Mr Peterson said.

"It begs the question, is the wheat market more sensitive and fragile than we first thought it was and I think the last six months has probably answered that question."

Over the last 20 years the global wheat market had been a relatively stable environment which was easily navigated with price and risk management strategies.

During that time (with exception to the 1995/96 season) wheat futures in the USA had a trading range of about $75 a tonne and growers thought the market was "volatile" when there was a drop of $75/t drop during that time frame.

In comparison Mr Peterson described today's global market as unpredictable, volatile and "absolutely hostile".

"Look at the five months in late 20007/08 when wheat prices went up $280/t in a five-month period in the US," he said.

"Following that, over a two-month period prices came down nearly $200/t.

"In June and July this year wheat prices rose $115/t over five weeks.

"The instability speaks to a worldwide problem."

Mr Peterson said the new American crop in May this year bought new hope to the American market because it was set to be the third of three record yielding crops in a row.

"We were going to be adding stocks to wheat and moving forward," he said.

"Growers thought they'd be giving it away because there would be so much wheat around."

Although this was the consensus Mr Peterson said "perception wasn't always a reality."

A review since May this year revealed Russia pulled out of the market, floods in Germany downgraded quality and up to 50pc of its crop was downgraded to feed which produced limited export capacity, there had been a similar situation in the northern plains of the USA and Canada at the end of spring and the east coast of Australia had suffered a similar fate.

"It has pushed us to the situation where we have record high prices but we have a 25 million tonne deficit in production under consumption this year," Mr Peterson said.

"Instead of growing stocks as anticipated in May, June and July, now we're going to be reducing world stocks."

The movement contributed to a 60pc rise in wheat prices during the five weeks from the end of June to the start of August.

"Let me draw your attention to last week," Mr Peterson said.

"Wheat prices have been sky-rocketing and have reached new highs at this range.

"We had a four-day price increase which is equivalent to 50pc of that old 20-year trading range that we saw year in year out.

"That's volatility."

The USA had lost 9m hectares of wheat land area over the last 15 years to corn, soybeans and other oilseeds.

"There's a deficit trend in wheat production and I don't see any abatement for it under the current price and profitability scenario of all the crops the world's producing," Mr Peterson said.

"One of the major reasons for that is the yield difference gains between corn and wheat over the time period."

Mr Peterson said wheat yields had improved in the USA about 1t/ha since 1970 and in the same time corn had doubled its production capacity from around 5t/ha to more than 10t/ha.

"You can imagine the profitability for the extra 5t/ha plus the high demand for it, that makes wheat the very poor cousin when it's looking to buy land from corn and soybeans," he said.

But Mr Peterson assured the conference that the USA wasn't alone in the scenario.

"Corn and oilseed production in Canada since 1960 has moved from almost zero to nearly 9m hectares today," he said.

"Wheat has declined from about 14m down to 9m over the last 25 years or so.

"It shows the same negative trend of wheat losing out to more profitable crops."

That trend had been repeated all over the world according the Mr Peterson.

"Since 1990 North America has collectively lost 14mha of wheat growing land, or about 40m tonnes of potential wheat production," he said.

"If we had that land area, with the market being so volatile, you could imagine the difference it could have made in the market today."

Wheat had traditionally been planted in two belts across the northern and southern hemispheres at about the 25th and 55th latitudes.

"If we look at wheat, corn, soybeans and oilseeds around the world we see some cropping patterns," Mr Peterson said.

"From about 1985 onward wheat has had a down trending land area devotion and this year's land area for wheat is exactly the same as 1968 so we've made precious little progress over time which is concerning.

"The area dedicated to corn has gone up by 60pc.

"Soybeans, canola, sunflowers and oilseeds all together have gone up 400pc.

"My premise is, as we go forward there may well be more land become available for planting wheat throughout Europe, like in Russia and the Ukraine for instance, but it might not necessarily come into wheat production and it will be subject to the same financial impact, returns, patterns and decisions as the rest of the world."

Mr Peterson predicted the world population would have increased to 9.3b people by 2050 and the majority of the growth would take place in less developed countries.

"In 1950 the world wheat consumption was 229mt compared to over 660mt today," he said.

"If we project this number out with the population growth, by 2050 the world consumption of wheat will be somewhere around 900mt.

"That's an increase of 240mt from today that has got to be filled somewhere and somehow.

"These are incompatible long-term trends and something has to stop."

The highest growth in population, the highest fertility rate and the highest world hunger figures fall in a latitudinal zone largely between the two wheat production latitudinal zones.

Mr Peterson believed if the world population was to reach 9.5b by 2050 there would be an increase in population of about 300m people in Latin America, one billion people in Africa and as many as 1.8b people in Asia.

"There's very little overlap in the population growth zones and the wheat producing zones except for a small part of northern Africa, the Middle East and northern Mexico," he said.

"The growing population is largely going to have to be fed by production in the other hemispheres.

"Trade volume will grow rather than production increasing in the tropical countries."

Mr Peterson said world trade hadn't really shifted largely over the last 30 years due to the EU and the former Soviet Union's internal trade patterns.

"By 2050 we're going to double world trade to about 250m tonnes of wheat which is a lot to move," he said.

"Everyone in the world including the USA, Canada and Australia will have a piece of the action."

Friday, December 17, 2010

World Wheat Trade May Double by 2050

According to the recent U.S. Wheat Newsletter, world wheat trade may double or more by mid-century and the resulting pressure from rising demand will likely increase prices and volatility. That is the message U.S. Wheat Associates (USW) has shared with stakeholders at industry meetings across four continents since mid-November.

USW Vice President of Overseas Operations Vince Peterson discussed the question, “Wheat Outlook for 2010/11 and Beyond...Is it More Fragile than We Thought?” at several of those meetings, including the annual meeting of ALIM, the Latin American Assembly of Industrial Millers, in Cartagena, Colombia, a U.S. wheat producer meeting in Washington state and the 32nd session of the International Grains Council (IGC) in Perth, Australia, last week. USW President Alan Tracy also covered the topic at the Mideast and Africa District conference of the International Association of Operative Millers (IAOM), in Cape Town, South Africa. See Wheat Letter – November 18 for more information.

Nearly 700 people attended the IAOM meeting. Collectively, the attendees at these meetings represented about half of the world’s total wheat imports.

“This was an excellent opportunity to stimulate thinking and encourage buyers to develop closer ties with the reliable U.S. wheat industry in order to minimize future supply concerns,” Tracy said. “We started with a reminder that in spite of three record global crops and ample stocks, the Russian government’s export ban sparked an unprecedented supply and price shock.”

A broader view of the world wheat outlook reveals that such vulnerability stems from the fact that demand in regions that cannot grow much wheat is outpacing global production.

“Farmers are planting less wheat because feed grain and oilseed crops like corn and soybeans are more profitable,” Tracy said. “Higher yields offset some of this loss so wheat production is basically stable, but stable production will be inadequate to meet future demand.”

If consumption continues to grow with population alone, he said, global wheat production must increase 40 percent to 900 million metric tons (MMT) (33 billion bushels) by 2050.

“World wheat trade has been fairly stable,” Tracy added, “But a closer look shows trade is actually up by 250 percent since 1982 in less developed countries and the global trend is now moving up.”

Because wheat is grown primarily above and below the middle latitudes where population and consumption is growing, USW believes world wheat trade will have to more than double by 2050, to at least 250 MMT (9.2 billion bushels).

This is a key observation for private millers who import wheat, Tracy said.

“Production in wheat exporting countries will have to increase substantially, so wheat prices will have to rise relative to corn and other crops that compete with wheat for acreage. We’ll see more competition among buyers, more short supply years and even more price volatility,” he said. “Millers will have to put the same effort into managing risk as they put into managing their production processes, and our organization can help.

“The U.S. wheat industry has proven its commitment to supplying a wide range of high-quality wheat classes year-in and year-out,” Tracy said. “We back up that trust with trade and technical service as well as training opportunities. That is why developing a positive, long-term relationship with our reliable supply chain is a smart hedge against the challenges ahead.”

Click here (
to see Tracy’s complete presentation in this issue’s Online Edition. Click here to listen to an interview with Vince Peterson ( aired by the Australian Broadcast Company.

Monday, December 13, 2010

Wheat growers look for higher prices

by Brad Carlson
Idaho Business Review

Idaho wheat producers are finding their crops being held at the docks.

Four Portland exporters handle about half of Idaho’s wheat exports.

“They are so busy with corn and soybeans, we are having trouble fitting wheat into their loading schedule,” Idaho Wheat Commission Executive Director Blaine Jacobson said.

“That has tended to push the price of wheat up as well,” he said.

To make as much money exporting wheat compared to corn and soybeans, the exporter needs to raise the margin, Jacobson said. That portion does not go back to the grower but ultimately boosts the worldwide price.

High consumption of wheat worldwide is increasing prices, he said. Higher prices this year helped farmers cover fixed costs, Jacobson said.

The Kansas City Board of Trade nearby wheat futures contract price was $8.27 1/4 per bushel Dec. 8 compared to $4.62 June 8 and $5.20 1/2 per bushel Dec. 8, 2009, said Shelia Summers, marketing vice president for the board. The price is a benchmark for hard red winter wheat used to make bread, she said.

“Wheat prices are up, and have been up since August when Russia put an export ban into place,” Jacobson said. Russia banned wheat exports as drought, heat and fires cut the crop by one-third from a year earlier.

Prices were depressed early in the year, when wheat stocks were their highest in nine years, he said. Prices increased sharply after Russia imposed the export ban and now are up 71 percent from their low point in the past year, he said.

Russia wasn’t the only challenged wheat producer.

“The Canadian crop and the Australian crop had their own problems,” Jacobson said.

Canada’s planted area was the lowest in 40 years and harvest dropped about 17 percent from a year earlier, he said. Weather problems at planting and harvest reduced quality, he said.

In Australia, quantity was high but quality was reduced by rains at harvest, Jacobson. Quality problems reduced Australia’s exports to Asia, “so Asia will import more from the Pacific Northwest,” he said.

Recently high corn prices kept wheat prices high, he said. Corn prices usually are about $3 per bushel but now are about $5 per bushel, he said. About one-third of the corn crop is going into ethanol production, he said.

“The ceiling price on corn is the base price on wheat because a certain percentage of wheat can go into the feed channels,” Jacobson said. “As the price of corn goes up, it pushes the base price on wheat up.”

About 4 percent of this year’s wheat harvest will be fed in stockyards.

Thursday, December 9, 2010

U.S. Closing Columbia River to Barges, May Affect Wheat Exports

Shipping on the Columbia-Snake River System, a major gateway to the Pacific Ocean for U.S. wheat and barley exports, will be halted until March as the Army Corps of Engineers replaces locks and dams built as long ago as 1957.

Barge traffic will be “effectively” stopped along a 365- mile (587-kilometer) stretch from tomorrow until March 18 as lock gates are replaced at the John Day, The Dalles and Lower Monumental dams, Army Corps spokesman Scott Clemans said. Five other dams will be repaired during the period, he said.

Traffic through the river-locking system is slowest during the winter, with five to 10 barges a day, Clemans said. Barges primarily carry grains, fuel and garbage. The four-month halt is unusual because shipping is normally closed for only two weeks a year for routine maintenance, he said. The U.S. is the world’s largest wheat exporter.

“We completely understand the impact this outage has on our navigation stakeholders, but if we do not replace these gates, these facilities eventually become unsafe to use,” Clemans said yesterday by telephone from Portland, Oregon. “The alternative to this planned, coordinated outage would be an unplanned emergency outage that might shut down the navigation locks and entire transportation system for maybe a year or more.”

The oldest of the dams, The Dalles, was built in 1957 and will be replaced with a new gate that weighs 1.5 million pounds (680 metric tons), Clemans said.

Rail, Trucks

The Pacific Northwest was second to the Gulf of Mexico for wheat exports last year, said Steve Mercer, a spokesman for U.S. Wheat Associates, an Arlington, Virginia-based trade group. The northwest ports are supplied by the river system, as well as by trains and trucks, he said.

Many importers have accelerated wheat purchases before the river closure to meet needs over the next three months, and others may rely on alternate transportation, Mercer said. Most northwest wheat exports go to Asia, Central America and South America, he said.

“The closure certainly may have an impact on getting wheat from point A to point B, but a lot of customers have bought ahead, and there are other ways to get it there other than barges,” he said.

The U.S. has exported 7.3 million tons of wheat out of Pacific Northwest ports in the marketing year that began June 1, Mercer said. Purchases have been ahead of last year’s pace as customers boosted buying before the river was closed, and as Russia’s export ban increased demand for U.S. supplies, he said. Russia, once the world’s third-largest exporter, has halted shipments through July 1 after drought this year ruined crops.

Prices for the grain have jumped 45 percent this year, touching a 23-month high in August. Wheat for March delivery closed at $7.84 a bushel yesterday on the Chicago Board of Trade.

Last year, the U.S. shipped 10.4 million tons of wheat through the Pacific Northwest, about 40 percent of total exports, Mercer said.

Written by Bloomberg reporter Whitney McFerron

Wednesday, December 8, 2010

Ag panel: More technology outreach needed as food demand rises

Brad Carlson from the Idaho Business Review covered yesterday's Ag Panel Discussion on Biotechnolcy. The following article was published today.

Lab-to-field breakthroughs will play a key role in food production, so agriculture and its regulatory agencies will continue to deal with the sometimes-controversial approaches.

“The food industry in general is going to have to go through a second green revolution, if you will, to feed the number of people that need to be fed,” Idaho Wheat Commission Executive Director Blaine Jacobson said.

Food producers are challenged to meet growing worldwide demand. One challenge is to get the advancements into field, feedlot or dairy soon enough and on a lasting basis given environmental and other regulatory concerns that can arise, panelists at a recent roundtable discussion on ag technology said. The Idaho Business Review co-hosted with Holland and Hart the event Dec. 7 in Boise.

Seeds that have been genetically engineered to resist weed killer and drought, and use fertilizer more efficiently, benefit farmers. But ongoing litigation over weed-killer-resistant sugar beet seeds shows the industry must keep working on solutions that satisfy regulators and the environmental community as well as producers, panelists said. Opponents in the sugar litigation fear the seed traits would spread to other parts of the food supply.

Population gains, a decreasing supply of good farmland and reduced inputs drive the need for greater yield and efficiency, said Bob Zemetra, University of Idaho professor of plant breeding and genetics. Genetic work can improve prospects for this, but getting these seeds into widespread food production takes time. He said it probably will be 10 years before the U.S. sees transgenic wheat, a plant that contains a gene or genes which have been artificially inserted instead through natural acquisition, in the food supply.

Jacobson said adoption of genetically altered wheat probably will happen first in developing countries where need is high and drought tolerance could make more land viable. In the U.S., the industry wants a defined process of approval, he said.
Worldwide wheat production will have to double in 40 years to meet demand as populations increase and standards of living improve, he said.

There is a lot of arable land in the world, but much of it is costly to bring into agricultural production, “so we are where we are in what we can produce on,” said Dick Rush, U.S. Department of Agriculture Farm Service Agency director for Idaho.
Like other ag industries, the cattle industry must do more with less, Idaho Cattle Association Vice President Wyatt Prescott said. Science’s benefits to the industry include improved breeding programs, better treatments for illness, more efficient use of feed and an increase in desirable characteristics in animals. More public outreach and education is needed about how the U.S. food supply is developed and managed, he said.

Beet growers boosted yields, as prices stayed flat, largely because of technology, said Idaho Sugar Beet Growers Association Executive Director Mark Duffin. Weed control, traditionally done by hand, was a big problem the genetically engineered seeds helped solve in the last couple of years, he said.

Monday, December 6, 2010

Goldman Sachs Predicts High Crop Prices to Stay into 2012

The current food commodities rally is to prove more sustained that the last, as strong demand mops up a big chunk of rising crop production, Goldman Sachs has said, forecasting "still historically high" prices in 2012.

While futures prices will be unable to maintain the current pace, they will remain well above levels before the latest rally kicked off in late June, the investment bank said.

Supplies will remain under pressure from firm consumption from biofuels plants and livestock farms, both in the US and emerging markets, with American soybean inventories potentially on course to fall to 4.0%, as a proportion of use, the lowest since the 1960s.

"Although we expect a supply response to the current tight balances in the 2011-12 crop year, the concurrent tightening across all major crop balances and the continued strong demand from feed and fuel will likely limit the recovery in inventories," Goldman said.

"As a result, our outlook for the 2011-12 crop year points to sustained elevated crop prices, and we introduce 2012 crop price forecasts only slightly below our 2011 forecasts."

Acreage battle

Soybean prices appeared the best-placed for gains, requiring a move "sharply higher" to some $14 a bushel to "limit acreage loss" in the US, the oilseed's biggest producer, in the spring and lift sowings in South America to meet resilient demand.

Forecasts for continued strong Chinese economic growth in 2011 and 2012 imply "further remarkable strength of Chinese soybean consumption, supported by rising protein consumption and surging animal feed [needs]," Goldman said, adding that South American demand was expanding fast too.

"In particular, biodiesel demand in Brazil is growing strongly, supported by the steady increase in required biodiesel mix into diesel."

Chicago soybeans for November 2011 delivery offered an "appealing entry level", the bank said, rating the contract a "buy".

'Strong feed demand'

Corn prices, which stood above $5 a bushel for less than nine months in the 2007-08 rally, were set to remain at some $5.85 a bushel into late 2011, and average $5 a bushel even in 2012.

"Our expectation for continued recovery in developing market and growth in emerging market protein consumption points to continued strong corn feed demand in 2011-12," Goldman said, noting that cattle placements on US feedlots had remained larger than expected, given firm feed prices.

Even if a tax credit on blending corn-based ethanol into forecourt fuel is rescinded at the end of this year, gasoline price forecasts suggest that biofuel groups will remain in profit as long as the grain does not top $6 a bushel.

Weakest link

Wheat faced the worst prospects of the big-three traded crops, facing "some supply response" in 2011-12 on the "return of normal weather and some acreage gains".

"We expect that still large inventories combined with the supply response to current high wheat prices will generate a small increase in stocks-to-use levels both at the global and US level," Goldman said.

"This outlook points to lower new crop wheat prices."

The bank forecast wheat falling from $7 a bushel next year to $6.25 a bushel in 2012.

However, Goldman added that a range of factors could potentially upset its forecasts, notably the impact of the ongoing La Nina weather pattern on South American crops, the course of US biofuels policy and the lifting, or implementation, of export bans.