Wheat futures gain 3% on lower global output forecast

No export decision yet as govt holds to the stock due to monsoon uncertainties

Wheat futures have gained 2.93 per cent so far this month on the National Commodities & Derivatives Exchange (NCDEX) in anticipation of an increase in export demand from production deficit countries. The foodgrain had lost 3.18 per cent in June.

The near-month contract on the exchange platform was traded at Rs 1,110 per quintal today — a significant rise from Rs 1,078.40 per quintal on July 1. The politically sensitive commodity was traded at Rs 1,111.80 per quintal on June 1.

In the spot market, however, the price remained range-bound at Rs 1,050 per quintal, Rs 30 lower than the state government announced rate of Rs 1,080 per quintal.

Vimal Sethi of Pooja Trading Corporation, an Amritsar-based grain trading firm, sees no major physical movement in Amritsar mandis. This is because almost all export orders are handled by government-run Food Corporation of India (FCI), which holds about 99 per cent of the country’s wheat stocks.

According to data compiled by Rabo Bank, wheat stocks with FCI as of July 1, 2009 were 36 million tonnes as against the buffer norms of 17 million tonnes. Owing to the uncertain monsoon, the government is holding the stocks and not considering exporting them. If July witnesses normal monsoon, wheat exports of around 5-6 million tonnes appear feasible given the abundant stock build-up, a Rabo Bank report says.

The price rise is purely speculative in nature as neither export nor local demand supports the logic, says Sethi.

The government on July 4 lifted a 28-month ban by allowing export of 900,000 tonnes of wheat by state-owned trading agencies. The ban was imposed in February 2007 as wheat procurement had declined and the country had to rely on costly imports.

According to an estimate by United Nations’ Food and Agriculture Organisation (FAO), which leads international efforts to defeat hunger, global wheat output is likely to decline by 4 per cent to 655.8 million tonnes in 2009, compared with 684.6 million tonnes in the previous year. FAO’s first forecast for wheat trade in 2009-10 stands at 114 million tonnes, down 8 per cent, or 10 million tonnes, from the estimated 2008-09 record volume.

Rabo Bank, however, apprehends that weather conditions in the northern hemisphere will dominate the world wheat market's focus in the coming months as harvest takes place. Planting in Argentina has reportedly been 50 per cent lower this season at 900,000 hectares (ha) due to low soil moisture level.

Dry conditions over parts of Europe in recent months have resulted in production setbacks. Strategie Grains, a global research agency, has trimmed its forecast of European soft wheat by 2.6 million tonnes in June to 126.3 million tonnes, a 9.8 per cent decline from the previous year.

Global wheat prices collapsed in June with major exchanges in Chicago and Paris shedding 21 per cent and 12 per cent, respectively. Additionally, the threat of a strengthening El Nino weather pattern may impact Australian production and, hence, world net exportable surplus late in 2009.

While in previous seasons, the scenario created a bullish global price environment, in 2009-10 world wheat stocks are likely to increase for the second successive season, limiting the potential impact of an El Nino development. In India too, despite exportable surpluses, the government is unlikely to allow excessive exports until sowing ensures bumper crop, as estimated, this season. Hence, Sethi foresees no major price fluctuation this year.