September 24, 2007

 

World 2008/09 wheat output to hit record at 700 million tonnes

 

 

Assuming trend line yields, the world in 2008-09 will grow more wheat than ever, with global production seen reaching 630 million to 700 million tonnes after a record-breaking price rally this summer.

 

The US Department of Agriculture last week pegged the 2007/08 world wheat crop at 606 million tonnes. The estimate was down considerably from earlier this year thanks to unfavourable weather in key producing countries, including droughts in the Black Sea region and Australia.

 

World wheat futures this summer soared on the crop losses as global ending stocks sank to historically low levels. The USDA this month pegged world stocks at 112.4 million tonnes, the tightest in three decades.

 

In an all-time high, benchmark Chicago Board of Trade December wheat last week hit a high of US$9.11 1/4 per bushel.

 

The lofty prices should entice growers around the world to seed more wheat than usual, analysts said. The expansion in production then should pad ending stocks and cause prices to fall, illustrating an old trading adage that "high prices are the best cure for high prices," they said.

 

Weather is the determining factor in the size of the global wheat crop, said Shawn McCambridge, analyst with Prudential Financial. However, he said he didn't "see why we couldn't move up to record levels next year if we see favourable weather."

 

The current global wheat production record is 628 million tonnes and was set in 2004/05, according to USDA data.

 

Next year, global wheat output will likely total about 680 million to 700 million tonnes amid expanded plantings in the US and overseas, said Roy Huckabay, analyst with The Linn Group.

 

Citigroup analyst Terry Reilly said he also expected a significant increase in production. He pegged the 2008/09 crop at 685 million tonnes.

 

In the EU, a proposal to cut the 10 percent obligatory set-aside rate for autumn 2007 and spring 2008 sowings should allow wheat plantings to increase, Huckabay said. The cut was officially proposed this month in response to increasingly tight cereal supplies.

 

The EU is expected to debate the future of the set-aside system in November. A government commission said cutting out set-aside in 2007/08 would likely boost overall grain output by at least 10 million tonnes

 

In other growing areas, such as India, additional wheat acres will come at the expense of other crops, Huckabay said.

 

"You're going to see huge (wheat acreage) increases in India," he said. "You're going to see huge increases in all of Eastern Europe. You're going to see Western Europe plant more wheat and less oilseeds."

 

US farmers should plant an additional five million acres of wheat in 2008/09, said Dale Durchholz, analyst with AgriVisor. For the 2007 crop, producers seeded 60.505 million all-wheat acres, according to the USDA.

 

There have been some fears that US winter wheat growers may not be able to find enough high-quality seed to follow through with new-crop planting intentions this fall, although Durchholz said he was confident acreage would go up. The shortage of high-quality seed became a concern in some states, such as Oklahoma, after a poor harvest of the last winter wheat crop lowered the amount of suitable seed available to be replanted.

 

"We're going to get extra aces here in the US," Durchholz said. "Some people want to say, 'Well, we don't have seed and yadda, yadda.' Yeah, right."

 

Dan Cekander, analyst at Fimat Futures, predicted global wheat production would come in around 630 million tonnes in 2008/09, assuming a recovery of production in Australia, the Black Sea region, Europe and Canada. Canada's crop suffered from excessive heat and dryness in some areas, while excessive rain at harvest time hurt yields in parts of Europe.

 

"It's just a matter of getting back to a more normal yield, although the (planted) area should expand," Cekander said about the potential for next year's crop.

 

Bill Tierney, executive vice president of research and marketing for John Stewart & Associates, pegged world production at 640 million tonnes and said "there is every reason" to expect significant acreage increases in the US and EU There is also the potential for an increase in winter wheat seedings in the former Soviet Union, including Ukraine, Russia or Belarus, he said.

 

Winter wheat seeding in the former Soviet Union is "overwhelmingly a function of weather," so it's uncertain whether growers there will definitely bump up plantings, Tierney said. If soil moisture is adequate and producers can get into their fields, "they will always try to maximize the sowing of winter grains," he said.

 

A global crop increase to 640 million tonnes would be big enough to create "a dramatic drop in price prospects" for CBOT July wheat, which represents the new crop, Tierney said. CBOT July wheat should fall to somewhere between $3.50 and $4, but the contract won't slip lower than the price of CBOT July corn, he said.

 

"The floor under wheat futures for July next summer will be corn futures," Tierney said. "If corn futures drop to US$3, I still think wheat will be between US$3.50 and US$4. If CBOT corn futures are US$4, then I don't see (wheat) going below US$4."

 

CBOT July wheat Thursday closed at US$6.12, while CBOT July corn closed at US$4.03 1/2.