World wheat prices look set to fall this year if forecasts for the second-highest crop on record materialize, but weather disruptions or political actions by importing governments could break this trend, says a UK grain analyst.
Last week the International Grains Council raised its prediction for world wheat production next season by 2 million metric tons (mmt) to 272 mmt – which would be the second largest production on record – and says strong prices will boost global wheat plantings by 3%, to 224 million hectares (553 million acres).
According to figures from Jack Watts, a senior analyst with the Home Grown Cereals Authority (HGCA), this will include a 5% rise in plantings in the U.S. to 20.3 million hectares, a 15% increase in Russian acreage to 26 million hectares and a 2% rise in European Union (EU) sowings to 26.4 million hectares.
Watts said that with such a huge potential supply response, prices may fall from their current highs in the coming months. "If we come into the spring and we're seeing some good crop conditions, don't be surprised if we start to see some liquidation," he says in the HGCA's first forecasts for the 2011-2012 season.
This year European wheat prices have doubled from last summer as supply shocks in key producers such as Russia and Australia have caused fears of a shortage of world supplies. A surge in demand from Middle Eastern governments looking to guard against political unrest have bolstered prices further. Some observers fear a repeat of the stockpiling of the 2007-2008 food crisis.
EU milling wheat futures are now trading at a premium to U.S. markets in order to ration demand after a surge in exports to MENA countries has sapped European supplies and left analysts predicting near record-low carryover stocks in 2011-2012. Watts says he expects the gap between markets to close as new crop supplies come to the market.
"We've had high EU prices above world prices to regulate exports," he says. "Now there needs to be a realignment because into the 2011-2012 season Europe needs to become competitive again." Still, after the volatility of 2010-2011, Watts says he is not ruling out further potential supply disruptions and prices look set to stay volatile going forward in the face of growing fears over food security. "It isn't going to take many weather issues to spark the market again," he says.
In late February, European wheat futures slumped nearly 7% in one day as financial investors pulled out of the market as concerns over violence in the Middle East escalated. Markets rebounded sharply the following day as MENA buyers including Egypt, Morocco and Saudi Arabia swooped on the dips in a bid to secure supplies.
"Volatility over the past few years has given birth to a supply response," says Watts.
"Looking at the strongest preplanting price the world has ever seen for 2011-2012. If they continue until 2012 we may see a further supply response."