3rd Jan 2013, by Agrimoney
Wheat futures proved one of 2012's best performers in the commodities complex, rising 19% in Chicago, 17% in Kansas and 6% in Minneapolis.
Values were supported by the poor US corn crop, which has sparked a switch to wheat by livestock feeders. Indeed, the US estimates its feed and residual use of wheat near-doubling to a 14-year high of 8.6m tonnes in 2012-13.
Globally, use of the grain in feed is expected at its second highest ever, at 132.3m tonnes. Yet supplies stored by major exporters are low, in part thanks to a poor harvest in the Black Sea, and particularly in Russia.
Indeed, the prospect of export demand switching to Europe helped Paris wheat futures outperform, rising 24%, with those in London soaring 35%, getting an extra fillip from a dismal domestic harvest.
Will wheat prices gain again in 2013? Leading commentators give their views.
Commerzbank
"A shadow has already been cast over 2013-14 by the worst assessments of the quality of the developing US winter wheat since records began.
"It is still unclear whether this will actually be reflected in a poor crop. Although the risks are to the downside, we see no grounds for a horror scenario at present.
"Rather, we expect the wheat market to ease moderately in 2013-14 – not least because global wheat acreage will increase by 2% according to the International Grains Council – and prices to dip at a still high level to $7.50 a bushel in the fourth quarter of 2013."
Goldman Sachs
"We continue to forecast lower wheat production than the US Department of Agriculture in Australia and Argentina and expect that 2012-13 global wheat inventories ex-China and India will decline to their lowest levels since 2007-08.
"This suggests that wheat prices likely need to rise high enough above corn prices to price themselves out of feed rations. Yet, these global wheat inventories still remain well above global corn inventories, a stark difference to 2007-08.
"As a result, wheat feeding remains necessary to help supplement low corn supplies, suggesting that wheat prices have to remain close to corn prices.
"As we turn to 2013-14, we see risks that the supply response may be limited as winter wheat crops in the northern hemisphere are off to an already-poor start. A further decline in global supplies in 2013 creates risks that global wheat inventories decline even further.
"Such an outcome in the face of inelastic food demand would likely push wheat prices sharply higher and well above corn prices to price wheat out of feed demand."
Darrel Good, Department of Agricultural and Consumer Economics, University of Illinois
"US wheat production rebounded in 2012, but production in the rest of the world declined sharply, leading to some improvement in US export demand.
"High corn prices also increased the level of domestic wheat feeding, but year-ending stocks will be adequate.
"US acreage is expected to increase in 2013 and foreign production is expected to rebound. The near-term focus will be on the status of drought conditions in the hard red winter wheat areas.
"Most of the 2012 wheat crop in Illinois has been sold, at an average price near $8. Prices during the first half of 2013 are expected to remain high. A subsequent decline to the $6-7-a-bushel range would be expected with good US and world crop prospects."
Morgan Stanley
"News flow surrounding weak production in the Black Sea and elsewhere has been constructive for wheat prices.
"However, strength in wheat should reduce feed substitution from corn, resulting in relative underperformance.
"Longer-term, a rebound in 2013-14 global production and lower con prices should pressure wheat, though a comparatively more comfortable corn balance will allow wheat prices to build back their historical premium to corn.
"Global wheat production is seen rising year on year in 2013-14, pressuring prices, as the major exporters recover from 2012-13's disruptions.
"It is too early to write of US winter wheat yields. History shows rainfall and temperature during the spring growing season are the main determinants of final yields."
Rabobank
"Chicago wheat prices are forecast to rise to $9.10 a bushel in the first quarter of 2013. Stronger US corn prices in the quarter are likely ot support world wheat prices in the same period.
"But the northern hemisphere wheat harvest is expected to bring about a strong fall in prices from the first quarter to the second quarter, provided production in the US, the European Union and Black Sea region is within 5% of trend.
"Wheat prices are forecast to maintain a premium to corn in order to limit wheat feed use in the US.
"We believe the spread will decline to $0.75 a bushel in the second quarter, due to the winter wheat crop. Conversely, the spread is likely to rise to $1.10 a bushel in the third quarter as wheat harvest pressure wanes and the corn harvest begins.
"Major wheat exporting regions are forecast to see the lowest ending stocks-to-use on record, of 11.3%, in 2012-13. Any supply shock in 2013 would thus have a large effect on wheat prices.
"The expansion of Russian wheat production will be a key bearish influence on the grains complex, with harvested area expected to rise 3m hectares to 25m hectares – the largest since 2009-10."
Societe Generale (long-term forecast)
"Wheat prices are historically correlated with the grain complex as a whole. With some 10 countries supplying the global market, spanning all corners of the globe, in situations where multiple countries simultaneously experience production-related problems, wheat then tends to move more on its own fundamentals.
"This was apparent in 2010 during the Black Sea drought and again in 2012 as weather concerns have arisen once more in several parts of the world."We note that global wheat inventories are steadily declining below historical averages and expect this trend to continue going forward.
"With arable land showing signs of stabilising after a long period of growth, competition on acreage is expected to intensify.
"Given the rapid growth in corn and soybean use in both livestock feeding and in the use of biofuels, wheat is expected to lose its share of this global acreage. Therefore, we continue to see wheat prices trending higher versus a more muted corn and soybean price forecast."
Wheat futures proved one of 2012's best performers in the commodities complex, rising 19% in Chicago, 17% in Kansas and 6% in Minneapolis.
Values were supported by the poor US corn crop, which has sparked a switch to wheat by livestock feeders. Indeed, the US estimates its feed and residual use of wheat near-doubling to a 14-year high of 8.6m tonnes in 2012-13.
Globally, use of the grain in feed is expected at its second highest ever, at 132.3m tonnes. Yet supplies stored by major exporters are low, in part thanks to a poor harvest in the Black Sea, and particularly in Russia.
Indeed, the prospect of export demand switching to Europe helped Paris wheat futures outperform, rising 24%, with those in London soaring 35%, getting an extra fillip from a dismal domestic harvest.
Will wheat prices gain again in 2013? Leading commentators give their views.
Commerzbank
"A shadow has already been cast over 2013-14 by the worst assessments of the quality of the developing US winter wheat since records began.
"It is still unclear whether this will actually be reflected in a poor crop. Although the risks are to the downside, we see no grounds for a horror scenario at present.
"Rather, we expect the wheat market to ease moderately in 2013-14 – not least because global wheat acreage will increase by 2% according to the International Grains Council – and prices to dip at a still high level to $7.50 a bushel in the fourth quarter of 2013."
Goldman Sachs
"We continue to forecast lower wheat production than the US Department of Agriculture in Australia and Argentina and expect that 2012-13 global wheat inventories ex-China and India will decline to their lowest levels since 2007-08.
"This suggests that wheat prices likely need to rise high enough above corn prices to price themselves out of feed rations. Yet, these global wheat inventories still remain well above global corn inventories, a stark difference to 2007-08.
"As a result, wheat feeding remains necessary to help supplement low corn supplies, suggesting that wheat prices have to remain close to corn prices.
"As we turn to 2013-14, we see risks that the supply response may be limited as winter wheat crops in the northern hemisphere are off to an already-poor start. A further decline in global supplies in 2013 creates risks that global wheat inventories decline even further.
"Such an outcome in the face of inelastic food demand would likely push wheat prices sharply higher and well above corn prices to price wheat out of feed demand."
Darrel Good, Department of Agricultural and Consumer Economics, University of Illinois
"US wheat production rebounded in 2012, but production in the rest of the world declined sharply, leading to some improvement in US export demand.
"High corn prices also increased the level of domestic wheat feeding, but year-ending stocks will be adequate.
"US acreage is expected to increase in 2013 and foreign production is expected to rebound. The near-term focus will be on the status of drought conditions in the hard red winter wheat areas.
"Most of the 2012 wheat crop in Illinois has been sold, at an average price near $8. Prices during the first half of 2013 are expected to remain high. A subsequent decline to the $6-7-a-bushel range would be expected with good US and world crop prospects."
Morgan Stanley
"News flow surrounding weak production in the Black Sea and elsewhere has been constructive for wheat prices.
"However, strength in wheat should reduce feed substitution from corn, resulting in relative underperformance.
"Longer-term, a rebound in 2013-14 global production and lower con prices should pressure wheat, though a comparatively more comfortable corn balance will allow wheat prices to build back their historical premium to corn.
"Global wheat production is seen rising year on year in 2013-14, pressuring prices, as the major exporters recover from 2012-13's disruptions.
"It is too early to write of US winter wheat yields. History shows rainfall and temperature during the spring growing season are the main determinants of final yields."
Rabobank
"Chicago wheat prices are forecast to rise to $9.10 a bushel in the first quarter of 2013. Stronger US corn prices in the quarter are likely ot support world wheat prices in the same period.
"But the northern hemisphere wheat harvest is expected to bring about a strong fall in prices from the first quarter to the second quarter, provided production in the US, the European Union and Black Sea region is within 5% of trend.
"Wheat prices are forecast to maintain a premium to corn in order to limit wheat feed use in the US.
"We believe the spread will decline to $0.75 a bushel in the second quarter, due to the winter wheat crop. Conversely, the spread is likely to rise to $1.10 a bushel in the third quarter as wheat harvest pressure wanes and the corn harvest begins.
"Major wheat exporting regions are forecast to see the lowest ending stocks-to-use on record, of 11.3%, in 2012-13. Any supply shock in 2013 would thus have a large effect on wheat prices.
"The expansion of Russian wheat production will be a key bearish influence on the grains complex, with harvested area expected to rise 3m hectares to 25m hectares – the largest since 2009-10."
Societe Generale (long-term forecast)
"Wheat prices are historically correlated with the grain complex as a whole. With some 10 countries supplying the global market, spanning all corners of the globe, in situations where multiple countries simultaneously experience production-related problems, wheat then tends to move more on its own fundamentals.
"This was apparent in 2010 during the Black Sea drought and again in 2012 as weather concerns have arisen once more in several parts of the world."We note that global wheat inventories are steadily declining below historical averages and expect this trend to continue going forward.
"With arable land showing signs of stabilising after a long period of growth, competition on acreage is expected to intensify.
"Given the rapid growth in corn and soybean use in both livestock feeding and in the use of biofuels, wheat is expected to lose its share of this global acreage. Therefore, we continue to see wheat prices trending higher versus a more muted corn and soybean price forecast."
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