After months of buoyancy following crop downgrades resulting from the US Midwest drought, global agricultural commodity markets are now on a correction spree with prices of grains (mainly corn), oilseeds (mainly soyabean), sugar, coffee and cocoa to name a few weakening. The one major exception is wheat.

World wheat production forecast for 2012-13 is being steadily downgraded. According to latest estimates, output could be lower by as much as 40 million tons from the previous year’s high of 694 million tons. The decline is on account of lower Black Sea region crop (lower yield in EU and Kazakhstan) followed by deteriorating prospects in the southern hemisphere origins Australia and Argentina.

What is more worrying is that world stocks of wheat that were hovering around 195-200 million tons are now set to reduce by about 25 million tons. Stocks with the five major exporting countries are also set to fall by about 20 million tons to a recent low of 50 million tons. Estimates of the 2012-13 stocks have steadily been downgraded.

So, the big question is: where will export supplies come from? Disaggregated numbers are disconcerting. It is seen that nearly 45 percent of global wheat stocks will be held by just two countries China and India, two of world’s largest producers and consumers. Despite being the world’s leading producer, China is not an exporter, but an importer of wheat.

That leaves India as a large producer and stockiest of wheat. With 94 million tons harvest and 38 million tons of government procurement, there is a humongous inventory waiting to be liquidated. The embargo on export was lifted a year ago. Wheat shipments from the country have totaled over 3 million tons. With the recent spurt in export prices and weak rupee, export prospects have brightened. To what extent India will fill the void remains to be seen.

Clearly, the sentiment in the world wheat market remains bullish, with poor export prospects from the Black Sea region fanning the fervor. This is precisely the kind of situation speculative capital waits for; and ‘long positions’ are being built on the bourses. On CBoT, wheat is traded over $ 9.0 a bushel, gaining nearly fifty percent from $ 6.4 a bushel a year ago.

The London-based International Grains Council has forecast a sharp fall in global wheat consumption to 679 million tons (692 million tons), reversing the recent rising trend in usage. Specifically, feed use is forecast to decline to 131 million tons in 2012-13, down some 14 million tons from the previous year. Reduced availability and high prices are expected to ration demand. The supply tightness is focused more on higher protein wheat grades.

Unlike corn and soyabean, wheat production is geographically more widespread; and the world’s two largest producers are not regular exporters, but consumers. No wonder, the export market will face a supply squeeze in the coming months.

(This article was published on November 13, 2012)
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