World Grain - April 2007 - 18

GRAINMARKETREVIEW

World wheat ending stocks

Wheat
Changing supply/demand
fundamentals, other factors
at work in market moves

(in 1,000 tonnes and percent)

40%

Stocks-to-use

Ending stocks

250,000

35%
200,000

30%
25%

150,000

20%
100,000

15%
10%
5%

Although wheat prices have retreated some from the 10-year highs
set in late 2006, price levels remain lofty, and the industry continues
to grapple with basic supply/demand fundamentals as well as less
traditional factors in the marketplace.
In November, indicative U.S. wheat export prices reached U.S.$215
per tonne, the highest since the June 1996 level of U.S.$227, amid
declining 2006-07 global production prospects and shrinking ending
stocks. As of mid-March, prices had eased to just above U.S.$200,
still the highest levels since July 1996.
The downward price pressure occurred amid small increases in
2006-07 global production and ending stocks estimates. Earlier in
the season, analysts forecast 2006-07 output at 585.1 million tonnes,
down from 621 million in 2005-06, led by a 14.5-million drop in
Australian production because of drought.
More recent projections raised the 2006-07 global wheat crop to
593.1 million tonnes. Although that figure remains significantly below the previous season's level, the increases from earlier expectations helped push prices a bit lower.
Another factor keeping a lid on prices has been very favorable
growing conditions for the 2007-08 marketing year U.S. hard red
winter wheat crop. For example, as of late March, progress reports
indicated 70% of Kansas wheat was in good-to-excellent condition
versus 38% at the same time in 2006, with Oklahoma, Texas and
Colorado crops also improved from 2006.
Regardless of the 2007-08 U.S. prospects, global stocks at the end
of 2006-07 will remain extremely tight. Those ending stocks recently
were projected at 121.2 million tonnes, up from earlier forecasts of
119 million, but down substantially from 147 million at the end of
2005-06. Notably, the stocks-to-use ratio continues at an estimated
19.5%, the lowest since at least 1980.
The tight outlook reflects projections that 2006-07 world wheat
use will decline by only 6 million tonnes, to 619 million, or less
than 1%. Significantly, 2006-07 wheat feeding is projected to drop
by only 3 million tonnes, to 108 million, down less than 3% from
the previous year.
When wheat prices rallied in 1995-1996, wheat feeding dropped
much more steeply in percentage terms. In the two marketing seasons
from 1994 through 1996, feed use declined by 15% and by 7% in the
1995-96 season alone.
The wheat-maize price spread always influences relative feeding
levels, and a wheat price above U.S.$200 a tonne typically cuts sharply into wheat demand. But historically high maize prices are expected
to limit users' choices.
As of mid-March, indicative U.S. maize export prices were around

50,000
0
198

7*
6-0
200 5
4-0
200 3
2-0
200 1
0-0
200 9
8-9
199 7
6-9
199 5
4-9
199 3
2-9
199 1
0-9
199 9
8-8
198 7
6-8
198 5
4-8
198 3
2-8
198 1
0-8

by Melissa Alexander

*projected
Source: U.S. Department of Agriculture

275
250
225
200

Indicative wheat export prices
U.S. No. 2 hard red winter wheat,
ordinary, f.o.b. Gulf
(in U.S. dollars per tonne)

175
150
125
100
75
50
Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*
*mid-month figure
Source: U.S. Department of Agriculture

U.S.$190 a tonne, only about U.S.$14 less than wheat prices. A more
"normal" spread would be about U.S.$50, premium wheat.
An expected surge in maize demand for ethanol in the U.S. has
supported the market all season, a new factor influencing price movements in the entire grains-oilseeds complex. U.S. use of maize for
ethanol in 2006-07 should be up more than 115% from four years
ago and is expected to account for 26% of total maize disappearance,
nearly equaling the level of U.S. exports.
Analysts say maize prices should remain firm at least until U.S.
plantings are known in the next few months, with maize area expected to jump at the expense of soybean and spring wheat plantings. But
a sustained policy push to increase U.S. ethanol output could provide
continued support for maize prices into 2007-08.
Another market factor is trading activity by so-called "funds,"
which, because they handle huge pools of international investment
money, significantly influence price movements. The funds' role in
commodity markets has been expanding since 2002, but has become
even more active amid recent geopolitical uncertainty, rapid growth
WG
in some economies and inflation concerns.
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