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ANALYSIS - Nations scour for wheat as drought shrivels supply

August 30, 2006

By Sambit Mohanty

SINGAPORE (Reuters) - From Australia to Argentina, erratic weather is slashing wheat crops of the major producers, which is threatening to push up prices to multi-year highs and making it difficult for countries to replenish stocks.

While the world's carryover stocks could cushion the blow, the crop woes coincide with rising demand from Europe and India, which is grappling a with a huge shortfall.

Appetite for feed wheat for livestock is also likely to grow as mills cut the usage of corn because its price has soared on strong demand from ethanol makers.

"It is going to be a year of tight supplies," said Mark Samson, vice president for South Asia of the U.S Wheat Associates. "And with expectations of high world prices, more hedge funds are increasingly paying attention to this market." The interest of investment funds in grains is growing and helping to push up prices. The Deutsche Bank Fund now allocates 22.5 percent of its investment funds to wheat and corn trading.

"Wheat prices are firm now and could still go higher," said Antonio Moraza, president of Pilmico Foods Corporation, a Philippines-based flour milling firm.

U.S. spring wheat has risen more than 15 percent to above $200 a tonne from last year on concerns about supply.

The United States had one of the hottest summers since the Dust Bowl years of the 1930s. The U.S. Agriculture Department has forecast output will fall 14 percent to 1.80 billion bushels, the smallest crop in four years.

The USDA expects the drought to push U.S. prices to its highest levels in 10 years.

Meanwhile, Australia's production is expected fall up to 30 percent from last year's 25 million tonnes due to dry weather and Europe also expects a lower wheat crop following a sweltering summer. This, coupled with rain in the final harvest stages, has downgraded a substantial amount of wheat to feed quality.

Canada, also plagued by hot weather, expects its wheat output to fall to 25.9 million tonnes from 26.8 million in 2005.

Argentina, which last year produced 12.5 million tonnes of weheat, has repeatedly lowered its forecast due to dry weather but has yet to issue a forecast.

As a result, U.S. wheat exporters are not willing to lower their prices, anticipating tight world supplies.

"Exporters don't want to be selling any more wheat at lower prices if we see quality losses in Europe and if we incur potentially some significant production losses in South America and Australia," said Shawn McCambridge, an analyst with Prudential Financial in Chicago.

World wheat production is expected to fall 4 percent to 593 million tonnes in the year ending June, 2007 from 618 million tonnes, according to the International Grains Council. This includes a cut of 3 million tonnes from the forecast last month due to the shortfalls expected in Europe.

Industry officials said there was a possibility that more wheat crops in countries could get downgraded to feed quality because of the weather. Extreme weather can reduce the protein content in grain, making it unfit for human consumption.


World wheat stocks are expected to decline to 117 million tonnes this year from 135 million a year ago, but some traders said stocks were enough to cap the price rally.

"Supplies will be a concern but will not be a huge problem this year," Moraza said. "But it can be a big issue if we see production shortfalls in subsequent years."

Another dampener on prices could be a bumper harvest in China. The International Grains Council expects China's stocks to show a year-on-year rise for the first time in seven years.

China's harvest is expected to rise 5.8 percent this year to 103.1 million tonnes, and industry officials said the surplus harvest could lead to exports.

But in general the major bread baskets of the world have a lot less to export to nations looking to refill grain bins.

The United States, the world's biggest grain exporter, expects exports to be slashed by 100 million bushels to 900 million bushels this year, according to the USDA.

Exports of U.S. hard winter wheat and durum wheat are expected to take the biggest hits. This makes up 65 percent of the U.S. wheat crop and is prized by millers for making bread.

"With all these changes, we might see high-protein wheat prices rising much sharply than soft wheats," Samson said.

Compounding the price woes are surging purchases from countries such as India, where the need to import has shot up because of it own crop shortfall. Last week, New Delhi said it would import another 2 million tonnes of wheat. India is expected to import a total of at least 7 million tonnes this year, according to traders.

(Additional reporting by Michael Byrnes in SYDNEY, Lisa Haarlander in CHICAGO and Michael Hogan in HAMBURG)

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