September 28, 2011


World wheat prices expected to stay at elevated levels



Global wheat prices are expected to remain relatively unchanged at current elevated levels throughout the 2011-12 season, according to Rabobank.


The bank's analysis suggests that risks are skewed to the upside based on the on‐going uncertainty surrounding final US corn production estimates and risks posed to South American production relating to the strengthening La Nina pattern, the bank noted in a report.


Global wheat values have declined in line with forecasts in Q3 but Rabobank do see some moderate upside from current levels as markets move into Q4. Wheat fundamentals appear bearish given the substantial recovery in global production this season.


However, further downside appears limited with the extreme tightness in the corn balance sheet. There is now very limited production risk remaining for the 2011-12 season as the Northern Hemisphere harvest is mostly complete and in the Southern Hemisphere, only Argentina's crop appears under threat at this stage. A stronger US dollar and a bearish September WASDE report together with heightened macro uncertainty have been the major causes for the fall in wheat prices over recent weeks. CBOT December 2011 contract prices have now shed 16.5% since late August and dropping below US$7 per bushel. While this correction has brought prices in line with the bank's forecasts held since mid year it has now reached the lower end of the range. Support is expected to be found at current levels.


Rabobank do not expect prices to revisit the 2011 contract lows set in July with the recent appreciation in Russian cash wheat prices likely to provide a floor for both US and EU values over coming months. Additional support is also likely to be garnered from the corn market with the corn wheat spread also providing wheat with a relative value floor.


Global production adjustments made by the USDA in September reflect the increasingly bearish wheat situation globally with world wheat production set to reach the third highest level on record.


The USDA lifted its world wheat production estimate by six million tonnes in its September WASDE to fall in line with Rabobank's current forecast of 678 million tonnes. This was largely reflected by higher revisions to Canadian EU and Black Sea region production.


Not surprisingly, higher wheat availability has resulted in the USDA lifting its estimate of global wheat feeding which is in line with Rabobank's expectations of greater wheat substitution for corn in the feed ration.