World’s Wheat Crop Not Yet A Writeoff

ICE Futures Canada canola contracts saw some choppy activity during the week ended May 13, finishing with declines for the most part as speculative profit-taking and ideas that seeding conditions were improving in parts of the Canadian Prairies weighed on values.

Those planting conditions are expected to be a key factor to watch in the canola market over the next few weeks. While it was still cold and rainy in Manitoba on Friday (May 13), the forecasts are looking warmer and drier heading into the second half of May and, aside from the flooded-out areas, the intentions for a large canola crop are still there. Aside from the weather, action in the outside commodity and financial markets could spill over to provide some nearby direction in canola as well.

Barley futures were untraded and unchanged once again, although cash bids saw some firmness.

In the U.S., the release of relatively bearish supply/demand data for soybeans and corn, predicting larger-than-expected ending stocks, sent prices sharply lower at one point, before the uncertainty over new-crop production came back to the forefront to provide support. Soybeans ended the week with small advances, while corn was slightly lower. Corn likely has the most room to the upside, as planting delays continue to lead to talk that some acres will shift out of the crop and into soybeans. Any upside in soybeans should also be tempered by the large South American crop currently being harvested.

Wheat futures also bounced around, but were down overall with some speculative profit-taking and spillover from outside markets weighing on prices.

A new area of concern for global wheat production seems to materialize every day: drought in the southern U.S. Plains, delayed seeding in Western Canada, more dryness in Europe. Those concerns obviously have the potential to drive international wheat prices higher, as was the case last summer when drought and poor crops in Russia and other former Soviet Union countries sent the wheat market climbing higher.

However, beyond those headlines, the doom and gloom over potential production problems may not be that bad. Last year’s climb in wheat prices definitely encouraged more wheat plantings, and most of those extra acres are far from being written off.

The U.S. Department of Agriculture released a world wheat production estimate pegging the global crop at 670 million tonnes in 2011-12, up from 648 million in 2010-11. With demand also expected to rise, ending stocks are forecast to edge lower by a million tonnes, to 181 million tonnes. At first glance, that stocks number doesn’t seem all that tight – and it’s not. From a historical perspective, the 10-year average for world wheat ending stocks is closer to 164 million tonnes. That means that there is definitely some breathing room, even if production does not meet early expectations.

WASTE REDUCTION

High grain prices were cited as one of the catalysts for the revolutions seen in Egypt, Tunisia and other countries over the past year. A well-fed population is more often than not a happy population, or at least a less-likely-to- riot population – and governments know this. Looking at the Egyptian example, the new government is already talking about increasing domestic wheat production and improving storage capacity in order to make the country less reliant on wheat imports. Egypt is normally one of the world’s largest wheat importers, but is now starting to implement plans aimed to eventually make the country self-sufficient in wheat production.

One of the problems in Egypt and elsewhere is not so much a lack of grain, but rather a lack of grain in the right place at the right time and a lack of proper storage. In the case of Egypt, it’s estimated that about 20 per cent of the country’s own wheat production is lost every year due to poor storage and transportation. That’s an issue in many other parts of the world as well, and if the same efforts were made to reduce waste in the system as are made to improve yields and increase acres, tight supplies might not be such a concern in global markets.

The Food and Agriculture Organization of the United Nations also came out with the results of an interesting study over the past week. It showed that about a third of the food produced for human consumption, or 1.3 billion tonnes, is wasted each year. That would be the equivalent to over half of the total world grain production in 2009-10 of 2.3 billion tonnes. The 222 million tonnes of food wasted by rich countries, which would include Canada, compare with the total food production in sub-Saharan Africa of 230 million tonnes.

To simplify it to a basic supply/demand perspective: the wasted food can be seen as indicating that a third of the demand for the grain grown in Western Canada is coming from the dump, or the compost pile, or the dog’s dish. Who knew that not cleaning your plate was one of the factors propping up commodity prices?

Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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