Deteriorating crop conditions in Australia, lower than expected production in Europe and strong global demand set the stage for aggressive buying by end users in mid-September, which pushed wheat prices close to $9 a bushel.
When asked how big an acreage response to prices might be expected for next season, market analyst Jonah Ford, speaking at the Minneapolis Grain Exchange September press briefing said, “A whole bunch. I can't give you a hard number this early in the season. But with the profits farmers can expect to see at these prices, you're going to see a pretty big shift. The shift has already been priced in, if you look at July 2008 futures.”
At one point in mid-September, December wheat futures at the Chicago Board of Trade were around $8.50 a bushel, with July 2008 coming in around $5.87.
One surprise in USDA's Sept. 12 world supply and demand estimates was the agency's projection for Australian wheat production of 21 million metric tons. Most in the trade believe production is actually closer to 15 million metric tons to 19 million metric tons, due to dry weather.
“Most of the Australians are fairly pessimistic on their production, thinking it's closer to 14 million metric tons to 16 million metric tons,” said Ford, who is senior analyst for Great Pacific Trading Company.
According to a CBOT report, Pakistan may import a million metric tons of wheat this year. In addition, France has revised its total production downward by 1.25 million metric tons to 31.65 million tons.
The upshot is that there is growing end user concern with the price of wheat, according to Ford. “Obviously those who did not get hedged earlier this year are paying a pretty severe price.
“Without fundamental shifts — whether taking millions of acres out of conservation or just having prices so high that it stimulates global production — trendline yields and world production are not keeping up with the expansion of the global economy.”
The situation should carry over to other crops, too, noted Ford. “Those in the soybean business are going to be looking around for acreage next year, and it would probably be a good idea for them to lock in prices on oil and meal.”
Ford did add that if land is taken out of the Conservation Reserve Program and committed to wheat production, “you'll probably see a knee-jerk reaction initially. Looking at the global supply situation, it may shave 10 percent or 15 percent off respective prices. World demand is still strong and understated by the market.”
The impact of wheat prices on consumer food prices could become a big story next year, too.
Corn prices, while weaker by comparison, will most likely start to improve by March, according to Ford, a situation which should benefit producers with storage capacity. “The demand in corn is still there. Worse case scenario, we're down to $3.15 to $3.25 on December futures.”
Short-term for corn, “we could be in a sideways trading range for the next few months,” Ford said. “Nonetheless, if we do get upwards of $10 wheat and $10 beans, there will be as much substitution as the world will allow. And that's going to keep corn prices above $3 and perhaps stimulate a rally going into next year as well.”
While USDA lowered its estimate of ethanol use in the United States, Ford doesn't see a letup in the expansion of ethanol production capacity “as long as we're anywhere near $80 crude prices, which is where we are now. Ethanol is going to keep rolling along until we get to a point where prices exceed what people are willing to pay. And I don't think we're there by a long shot.”