Tuesday, December 14, 2010

Wheat Prices Set to Go Higher?

The USDA published their monthly outlook report on wheat today and it makes for interesting analysis. You can review the source document here and it makes a slightly bearish reading

"World 2010/11 wheat supplies got an almost 5-million-ton boost this month from a combination of a 3.6-million-ton increase in production, with major increases in Australia, Pakistan, and Canada, and from a 1.3-million-ton upward revision in beginning stocks. Increased 2010/11 wheat supplies more than compensate for a 0.7-million-ton increase in consumption. World wheat ending stocks for 2010/11 are projected higher this month by 4.2 million tons to 176.7 million tons."

Furthermore, US total wheat ending stockpiles are reported to be at around 858 million bushels (23.4 million tonnes)...
One-Year Chart for Total Wheat Ending Stocks (WUSETWES:IND)

source: bloomberg

Now, this chart is slightly misleading because although stockpiles have been coming down since July, they remain significantly higher than where they were in 2008 when wheat prices hit an all time high. For example, stockpiles were at a low of 250m bushels (as compared to the 858m now) in 2008 when wheat prices were doing this...

Wheat - Monthly Price - Commodity Prices

source: indexmundi.com

So we can see that wheat prices are moving up as stockpiles decline from July. This makes sense as you would expect them to be correlated. However, how come the move is so dramatic because stockpiles are far higher than what they were in 2008? In fact, they are higher by a factor of 3.4x

First of all, we have had a drought in Russia this year which caused the Russians to stop exporting wheat; secondly the wet weather in Australia has called into question their crop production for 2010/11. Thirdly, if we go back to the USDA report we see that consumption...

"Global consumption of wheat in 2010/11 is projected up 0.7 million tons (about 0.1 percent) this month to 666.5 million,"
is expected to be higher than production...
"Global wheat production for 2010/11 is forecast up 3.6 million tons this month to 646.5 million."
This is despite production being forecast to be at the second highest level ever. Furthermore, long term wheat demand is predicted to be good.

In addition the amount of wheat planted in the US has been falling in line with pricing (millions of acres)...

                                       04/05     05/06     06/07    07/08    08/09   09/10     10/11
Area Planted                   50.0       50.1       46.8      51.0      55.7     49.9        47.6
Area Harvested               59.6       57.2       57.3      60.5      63.2     59.2        53.6
source: USDA website

Furthermore, this time around (as compared to 07/08) the price of rival crops that farmers could be planting is also very high. For example, sugar..

Sugar - Monthly Price - Commodity Prices

and cotton...

Cotton - Monthly Price - Commodity Prices

and soybeans...

Soybeans - Monthly Price - Commodity Prices

So I suspect that if you combine all these factors there is still potential for upside with wheat prices despite stockpiles being currently high.

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