World wheat price crisis

13 July, 2007
Lewis Wright, head of wheat trading for ADM Milling, points to the sensitivity of the world wheat market and predicts continued volatility and pricing pressures
Over the past 12 months, UK wheat prices have entered into a period of increased volatility. We have seen quite marked price variations day to day and week to week, but with the overall price trend being upwards. The LIFFE futures price for feed wheat in November has increased by £41 per tonne from this time last year and the HGCA quoted breadmaking wheat price for November, basis Liverpool, has increased by £57 per tonne.
Sensitive marketThe world wheat market is very sensitive at the moment. The supply and demand balance sheet places ending stocks for 2007/2008 at their lowest level for 30 years, which is one factor that has caused the increase in global wheat prices. However, it does not end there. The global closing stock number is based on current harvest projections around the world being achieved, and there are already reports indicating that it may not.There have been various world weather fronts affecting key wheat-growing areas that have put into doubt these production projections being reached.The US has been suffering from rain that has caused harvest delays and given rise to concerns on both yield and quality deterioration.Eastern European crops in Romania and Bulgaria and in the Ukraine and Russia have all suffered from drought that has seriously affected their production estimates. The Ukraine, a traditional world exporter, has cut back its production estimate from 18m tonnes to 12m tonnes.As we now approach harvesting of the wheat crops in Western Europe the rain that has fallen has been causing concern in France, Germany and the UK - the three largest wheat-producing countries in the EU - and already analysts are reducing their estimates for the potential for wheat production and quality in these countries.As well as the overall crop size, quality supply issues are an area that millers and bakers alike need to watch closely. The UK has seen a shift in the wheat types farmers are growing. Over the last several years, there has been a switch towards higher-yielding feed grades, with the breadmaking grades that millers need for breadmaking flour being reduced. This has reduced the availability of breadmaking wheat in the UK by over 31% over the last three years. The consequence of this is that now, and in the future, we have to pay higher premiums for breadmaking wheat. We are experiencing this increase in premiums already, as it impacts on breadmaking wheat prices and, coupled with reduced supply and increased demand, year-on-year breadmaking wheat prices in the UK are up by over £57 per tonne.Increased demandWorldwide, we are seeing the demand for agricultural commodities increasing through continued food demand, but more so now through the demand for biofuel production and this is being mirrored in the UK.The UK traditionally exports in the region of 2m tonnes of wheat each year and recent bioethanol production plant announcements, such as that announced by ABF last week that will use 1m tonnes of wheat per annum, have already increased the domestic demand by more than the UK wheat exportable surplus, by 2009/10. Again this will have price effects, not only on the base wheat price but also the milling premium.We will continue to monitor developments over the coming weeks as the harvest progresses and some of the uncertainties become factual. However, longer-term, price volatility and uncertainty look likely to remain.



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