Thursday, March 10, 2011

What a surprise - global wheat supply is better than expected

Some readers will recall a minor controversy that occured a few weeks ago regarding the underlying causes of higher food prices. There were two views. Some thought that higher prices were primarily due to fundamental changes in the world economy. Economic growth in the Far East was generating higher demand, while climate change was disturbing production.

An alternative view pointed to lower interest rates and the potential for speculative pressures to push prices far beyond any changes in economic fundamentals, such as higher demand from emerging economies or supply shocks.

The first view, which could be called the fundamentalist view, were keen to point to a reported decline in government holdings of agricultural stocks (which were often erroneously described as inventories).

The fundamentalists position took a severe knock today. The US agricultural department has just published its latest market report. It made very interesting reading. Here are a few selected highlights:
  • There is more US supply and government stocks than previously thought - U.S. wheat ending stocks for 2010/11 are projected higher this month on reduced export prospects. Projected exports are lowered 25 million bushels with increased world supplies of high quality wheat, particularly in Australia, and a slower-than-expected pace of U.S. shipments heading into the final quarter of the wheat marketing year.

  • There is more global supply - Global 2010/11 wheat supplies are projected 1.9 million tons higher reflecting higher production. Argentina production is raised 1.0 million tons based on higher reported yields. Australia production is raised 1.0 million tons with higher yields in Western Australia where wheat quality was not hurt by harvest rains as in the east. Other production changes include a 0.5-million-ton reduction for EU-27 with a smaller crop reported for Denmark and a 0.6-million-ton increase for Saudi Arabia on an upward revision to area.

  • World demand is lower than expected - Global 2010/11 wheat consumption is projected lower with the biggest change being a 1.5-million-ton reduction in expected wheat feeding for Russia. With increased global production and reduced usage, world ending stocks for 2010/11 are projected 4.1 million tons higher.

There are those who love to talk up a crisis. There are others who know how to profit from such talk. Then there is the rest of us, who end up suffering from the joint activites of the miseralists and the speculators.

Over the last month, wheat prices have fallen sharply. A bursting bubble perhaps?

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