The Hindu Business Line : Global wheat prices likely to ease in H2

Forecast
On tight opening inventory levels and built up consumer demand, wheat prices may fall.
A slight pick up is likely in Q4 as the focus would shift to the battle for coverage with soyabean and corn and speculation over the index fund investment.

M.R. Subramani

Chennai, April 17 Global wheat prices are expected to ease in the second half of this year as a potential record-breaking world wheat crop looms. Though a number of months of still left till the northern hemisphere crops are harvested, at this stage, they appear to be in good shape, according to a Rabobank International “Soft Commodity Note”.

Stocks

Wheat stocks are expected to decline to 110 million tonnes (mt), the lowest in 30 years this season (July 2007-June 2008) with the stock-to-use ration of a low 18 per cent, the note said.

Global wheat plantings and production are expected to rebound strongly this year as farmers respond to record prices and policy changes, particularly in the European Union (EU) where the Common Agricultural Policy land “set aside” restrictions have been lifted, making available an additional 10 per cent land. That has led to a forecast of five per cent increase in wheat plantings in 27-member countries bloc.

Crop estimate

Rabobank said though it was early to make a crop projection for the next season starting July, it was forecasting a crop of 640 mt, a six per cent rise from this season.

“World production is forecast to outpace consumption for only the third time in the past nine season with the year-ending stocks forecast to nine per cent rebound over this season,” the note said.

A significant weather premium has been factored in 2008-09 prices given the 30-year low global stock levels and nearby futures price movements are expected to be driven by demand announcements, it said.

Policy changes such as ban on exports by Kazakhstan, unexpected announcement in demand and index money flow movements are factors that would drive the prices. Wheat for May delivery on the Chicago Board of Trade ruled higher at $342 a tonne on Thursday, though it is much lower than the $495 reached on February 27.

The note said downside risk was likely to be the greatest in Chicago, given the expected fundamental differences between hard and soft wheat this year. Significant harvest pressure is likely to be felt in Chicago from July-August onwards, given the US Department of Agriculture’s expectations on planting.

Premiums overdone

“Current weather premiums appear to have been overdone given the crop expectations in other parts of the world this season,” it said.

Wheat prices could retrace some of the recent grains in the second half of the season under the weight of bearish new crop fundamentals. Notwithstanding a tight opening inventory levels and built up consumer demand, wheat prices were expected to fall well by the third quarter of this year.

During the last quarter, a slight pick up was likely as the focus would shift to the battle for coverage with soyabean and corn and speculation over the index fund investment.

Rabobank has projected Indian production at 73 mt, a three per cent decline over last year due to extended dry periods during January-February, while estimating Australian output at 12.8 mt. China’s production was expected to be 104 mt, while Canada’s output is likely to rebound to 24.4 mt.

Despite the bearish signals, increasing investment from funds in the commodity markets, including wheat, is likely to skew prices to the high side of “historical fundamental fair values”, the note added.