2008 Wheat Market Outlook

Wheat prices in the last year have doubled and the outlook for strong prices will continue into the near future due to a number of factors, says Andy Knutson, cash grain buyer for ConAgra in Omaha, Nebraska.

“Weather problems in Canada, the EU, the Ukraine and Australia have contributed to world wheat production falling in 07/08.  World production has been below consumption in seven out of the last eight years,” says Knutson. “And world ending stocks are the lowest since 1977-78.”  He says ending stocks of major exporters have dropped 27% since last year.

“Interestingly, importers are buying wheat in spite of higher prices, and there are no signs of price rationing,” says Knutson.

“The weak U.S. dollar (the lowest in 30 plus years) is helping U.S. wheat exports. On top of that, India and Pakistan are working to build their stocks and Argentina and Russia have implemented export restrictions.

“Another contributing factor,” he says, “is wheat is losing acres to competing biofuel crops.”

U.S. Production
“U.S. wheat production in 2007-08 is forecast at 2,067 million bushels, up 255 million bushels from last year,” says Knutson. “But the stocks situation is much tighter than last year, due to lower carryover and increased exports.” Stocks are now forecast at 280 million bushels versus 456 last year, and the stocks-to-use ratio is forecast at 12 percent versus 22 percent last year.

World Production
Knutson says world wheat supplies are forecast at 602 mmt with reductions anticipated in the EU, Canada and Australia. “Stocks were lowered to 110 mmt compared to 124 mmt last year and are the tightest since 1977-78.”

Exports
In addition to the weak U.S. dollar, exports have climbed due to North African business, says Knutson.  In fact, he says for the balance of this marketing year (June 07/May08) exports need to be rationed to only 3.5 million bushels per week to meet the revised USDA number of 1175 million bushels.

What Growers Need to Know About Basis
“Basis,” says Knutson, “is the difference between the futures price and the local price at any location.”

Futures Price + Local Basis = Local Price

A number of factors affect basis, says Knutson.  These include:

• Transportation Costs
     -- Freight rates (including  fuel surcharges and car costs)
     -- Export markets
• Weather during harvest
• Stocks situation
• On-farm storage capacity
• Local supply and demand

“We’ve seen unprecedented basis swings this year,” says Knutson. “Commodity prices have traded to record or near record levels in most commodities.”  He says this has resulted in times when producers sell a large percentage of the crop in a short window (Example: Spring wheat this fall).

“In this environment, it is very important to take the time to understand basis, and separate basis from futures in your marketing plan,” says Knutson.