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Wheat prices are likely to increase further over the next few months supported by supply concerns, importing nations floating more tenders to buy the foodgrain and fears over production being hit by vagaries of weather, say analysts.
The outlook for wheat is despite worries of the Omicron variant of Coronavirus affecting the global economy.
The Food and Agriculture Organization (FAO) - a United Nations arm -, in its Agricultural Market Information System report on Market Monitor, painted a bullish picture by projecting lower than initially estimated output, higher consumption and, more importantly, a fall in stock-disappearance ratio.
Similar to 2007-08 scenario
The stocks-to-disappearance ratio is the volume of stocks held by exporters to their disappearance, including domestic consumption and exports. According to the FAO, the ratio of major wheat exporters’ closing stocks to their total disappearance is expected to fall to 12.5 per cent, the lowest in two decades.
US Wheat Associates quoted its Vice-President and West Coast Office Director Steve Wirsching as saying that the stocks-to-disappearance ratio during the current season (July 2021-June 2022) for major exporters is 13 per cent, similar to levels last witnessed in 2007-08 when wheat prices soared.
According to Market Monitor, wheat production this season (July 2020-June 2022) is estimated to be lower than initial estimates and last season, at 769.6 mt, while supplies are likely to be up at 1,059.1 mt. Utilization or consumption will rise to 777 mt, while stocks will drop to 284.7 mt.
39% Y-o-Y gain
Currently, Chicago wheat futures are quoted at $7.95 a bushel (₹22,000 a tonne) . Wheat prices have gained 29 per cent since the beginning of the year and 39 per cent year-on-year.
US-based Fitch Solutions Country Risk and Industry Research (FSCRIR), in its commodity strategy commentary, said wheat prices had actually dropped 10 per cent after rising to an eight-year high primarily due to concerns over the impact the Omicron Covid-19 variant might have on demand.
The ratings agency said it sees upside pressure for wheat that could see prices scaling up this month, far higher than the multi-year highs witnessed last month. “Many of the factors that have been pushing up wheat prices throughout the second half of this year remain at large, and we do not see any immediate resolution,” it said.
FAO’s Market Monitor said higher crude oil prices, a volatile stock market, swaying currency rates and weather have all exacerbated the situation in the global wheat market.
Outpacing utilization
US Wheat market analyst Michael Anderson said though wheat production is projected to be higher this year, usage is expected to outpace it by over 12 million tonnes (mt). Though production increased this year in the EU, Ukraine, Argentina and Australia, it dropped in Canada by 40 per cent (Fitch Solutions pegged it at 21.8 per cent year-on-year owing to drought).
Canada’s domestic consumption dropped by 13 per cent and, on the other hand, Russia’s offtake increased six per cent, while its exports are projected to rise 42 per cent.
He said the US Department of Agriculture has reported that 44 per cent of the US winter wheat is in good or excellent condition, but it is lower by two percentage points compared with the same period a year ago.
Weather plays truant
Some of the wheat growing regions have not received ample showers, while drought conditions worsened in the Dakota region of the Great Plains - the broad expanse of flatlands in North America. Wyoming, Kansas and Colorado have also been affected by drought, he said.
On the other hand, Australia, projected to harvest record wheat production, is witnessing continuous rains in the growing regions. This, market players fear, could affect the quality of the crop.
Fitch Solutions said supply side risk remains for the remainder of the current season supporting prices. Concerns remain over supplies from Canada, Russia, where the crop is seen 9.6 per cent lower, and the US.
La Nina impact
This could leave only a small surplus of 1.9 mt, much below the 13.7 mt average surplus seen during 2017-21. Despite concerns over the quality of the Australian crop, production is estimated to be three per cent higher, FSCRIR said.
The rating agency said the La Nina, occurring for the second consecutive year, could cause further damage to the Australian wheat crop over the next couple of weeks. The La Nina phenomenon posed risk to wheat production in some countries.
Russia’s export tax on grains to control surging domestic food prices, rising input costs with fertiliser prices ruling high and other costs will also impact wheat prices, Fitch Solutions said, adding that any easing of the market will happen only in the second quarter of next year.
Bullish outlook
Figures in million tonnes
Source: FAO AMIS Market Monitor
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