Wheat Perspective

Global Demand and Supply Conditions

For the United States, recent reports indicate less than optimistic growing conditions. Drought and shortage of seed supplies reduced hard red winter (HRW) planted area in the key producing states of Kansas, Oklahoma, and Texas. Overall, planted area for winter wheat increased by only 4%, compared with a previously expected 8%. While the soft red winter wheat area and white wheat increased by 21% and 7%, respectively, HRW wheat area actually declined by 1% in the high plain regions.

Weather conditions around the world have also been less than favorable. The wheat crop in Argentina was hit by freeze twice during the flowering season. While the government has not changed the size of the harvest, wheat exports, which were temporarily suspended, are expected to resume in mid-February. Consecutive droughts in Australia have also affected its wheat production, down 7 million metric tons already. Canadian wheat exports have been reduced considerably due to a significant drop in domestic production and fierce competition from U.S. supplies and a weak U.S. dollar. Strong oilseed prices due to world biodiesel demand cause an acreage shift toward canola in 2007, and will continue to compete aggressively for acreage in the 2008 growing season and beyond.

In Pakistan and India, wheat planting has been delayed by two weeks past the optimal period, due to problems with sugarcane harvesting. Pakistan has already banned all exports of wheat except exports by government-controlled agencies in order to control domestic prices. Plantings in the Black Sea countries are expected to increase by 20%. This has been tempered, however, by export restrictions placed by Ukraine and Russia, due to concern about domestic supplies and high price increases. Ukraine has already imposed restrictions on wheat exports. Russia increased its wheat export duty from 10% of the customs value to 40%. China also imposed export tax of 20% on wheat exports and 25% on wheat flour and starch exports, while cancelling the initial rebate of 13%. Extreme conditions in China's major main wheat growing area have resulted in some damage, and more imports are likely this year.

Demand for Different Wheat Varieties

High prices of wheat, particularly for HRW, have hurt the food industry. Since HRW is used in the production of bread, high HRW prices have resulted in an average price increase of 11% for a loaf of bread in the United States. Food manufacturers have been hit hard, trying to find short-term contracts for buying flour. Indeed, pasta prices have also increased, with the cost of durum wheat rising faster than prices for other wheat varieties. While durum wheat production is projected to rise in the coming years, prices are expected to remain tight, as the accumulation of stock is minimal.

In other parts of the world, the impact of high wheat prices has also been transmitted to consumers, particularly affecting countries where wheat is the staple. The price of bread has risen by 50% in Kyrgyzstan this year. In Nigeria, which the largest importer of U.S. HRW wheat, high prices of HRW have led to most mills operating well below capacity, and some shutting down altogether.

However, some recent developments are likely to have a positive impact on the wheat market. On the planting side, the EU has opened its "set-aside"; as a result, wheat planting area is expected to increase by 10%. Ocean freight rates are much lower than before, and should have some positive impact on exports growth. Changes in the functioning of the Canadian Wheat Board (CWB) and Australian Wheat Board (AWB) are also expected to impact exports. The AWB is expected to give up its monopoly status in 2008, while talks are ongoing for a similar arrangement with the CWB. The absence of wheat boards will put managers and producers in charge of wheat supplies and bring more transparency in the international wheat market. On the biofuels side, prices of corn and soybean remain high due to increasing biofuel production. However, prices of soybean are expected to take a slow turn due to a big Brazilian soybean crop, reduction in Chinese imports, and moderate crude oil prices. Needless to say, prices of competing biofuel crops will have a sizable impact on the wheat market.