Over recent months we have all relaxed as, despite problems with the quality of the UK harvest, wheat prices have fallen from their peak levels of a year ago. Since early December, however, the wheat market has rebounded, moving up by 15-20%.What is going on?
It boils down to a familiar story: markets tend to look forwards rather than backwards, and the future is uncertain. Although there was a record world wheat crop in 2008, plantings are lower for 2009. The International Grains Council estimates a fall of 1.6% globally, and trade estimates are for an 8% decline in the UK. So far, crops appear to have wintered well. However, in the southern hemisphere, Argentina is in the grip of a drought, which has reduced the overall harvest of many crops and reminded the market that supply and demand remain delicately balanced. Wheat stocks rose slightly after the 2008 harvest, but stocks of rice and maize remain at, or close to, record lows.
Essentially, if there is a significant problem during the growing season for northern hemisphere crops, it is likely that there will again be a deficit in production. The sharp decline in the value of Sterling is also unhelpful, and has increased the cost of imports sharply since the autumn.
That is why current quotations for new-crop (October/November) 2009 wheat are higher than today’s values. We can expect a nervous and volatile wheat market in the coming months, depending on the news about weather and crop conditions around the world. With luck, all will turn out well and prices will remain close to current levels. If things go awry, however, we had better be prepared for the return of higher prices, febrile markets and political intervention, as governments seek to secure food supplies.