Decline in global wheat output pushes prices up

A sharp 5.3 per cent decline in the global wheat output in 2006 has constrained supplies, pushing up prices to levels not witnessed for a decade.

But, this has also led to increased wheat sowing, improving production outlook for 2007 and is expected to have a moderating impact on prices.

However, despite reduced supplies and higher prices, world trade has remained at the previous year's high level mainly due to large wheat imports by India and Brazil.

The latest global food outlook report released by the United Nations Food and Agriculture Organisation (FAO) reckons the world wheat production in 2006 to be around 592 million tonnes, down 33 million tonne, or 5.3 per cent, from 2005 and below the average for the past 5 years.

Significantly, nearly all the major wheat exporting countries have reported lower crops during the year, resulting in one of the tightest periods for world demand and supply in over two decades.

This had caused the international wheat prices to maintain an uptrend during most of the 2005-06 marketing season. But the pace of price increase got accelerated in the later part of the year as production prospects deteriorated, especially in the wheat exporting countries.

By October, concerns over prospects for wheat harvests in major surplus producing countries, especially drought-hit Australia, got heightened, adding further strength to prices. Besides, the announcement by Ukraine to limit wheat exports through quotas also provided support to price surge.

The volatile, but rising, prices in October were followed by more subdued movements in early November before rising again towards the end of the month, the FAO report points out. In November, the US hard wheat export price averaged $ 219, about $ 52 a tonne, or 31 per cent, higher than the corresponding level in the previous year.

"Price development in the futures market has been supported not only by the wheat market's own fundamentals but also by a continuing rally in maize prices and heavy purchases by hedge funds", the report states. By late November 2006, the Chicago Board of Trade (CBOT) March 2007 contracts for soft red winter wheat resumed their upward trend and reached $ 191 per tonne, or 62 per cent higher than in 2005.

Regardless of the current tight market situation, the FAO expects international prices to return to more moderate levels thanks to improved production prospects of the new crops which have recently been planted or are currently being sown in countries in the northern hemisphere.

Increase in the area being planted with wheat and good growing conditions so far have raised expectations of a strong rebound in 2007 in world wheat harvest.

In Asia alone, the aggregated wheat output is projected to rise by at least 3 per cent in the present season. This is due chiefly to larger crops in India, China and Kazakhastan.

"As a result, wheat prices could be subject to more persistent downward pressure later in the season as supply prospects gradually improve", the FAO report maintains.