The Heat Is Online

Drought, Insects Deplete Global Wheat Supplies

Drought pushes wheat to 10-year high


The Financial Times, Oct. 10, 2006


US wheat prices struck a 10-year high on Tuesday on fears of a further decline in global production at a time when world stockpiles are near 20-year lows.


The latest rise is expected to lead to higher food prices, hitting bread, breakfast cereals, pizzas and pasta.


Wheat harvests from Australia to Argentina, Europe and North America have been affected by drought, heatwaves and, in the case of Ukraine, infestation from the Eurygaster beetle. Global wheat supplies have fallen about 5 per cent  or 30million  tonnes  from last year. Also Ukraine's wheat exports were stalled after authorities in Kiev insisted that grain traders apply for export licences.


Wheat futures in Chicago reached a 10-year high yesterday morning, touching $5.24 a bushel, a rise of more than 13 per cent in the past two days.


Traders said if the highs of 1996 were stripped out, prices would represent their highest levels in 30 years, referring to the heatwave of 1976, which reduced global grain output.


Chicago wheat futures have risen more than a third in the past month on dramatic revisions of the outlook for

Australias wheat crop, which is now expected to be less than half the 24m tonnes harvested last year.


About 70 per cent of Australias wheat output is exported, mainly to flour millers in Asia, which may now be forced to pay higher prices to secure supplies. Other big wheat importers include Egypt, Nigeria and Iraq.


This is not just an issue of an odd drought here and there but a structural issue with the wheat market, with global stockpiles so low and demand continuing to rise, said Chris Brodie, a partner at Krom River Partners, a London-based hedge fund.


Investors waded into global wheat futures in recent weeks, betting on further price rises. 


The US department of agriculture is expected this week to lower its assessment of global wheat stockpiles. Its current estimate of 126m tonnes  about 57 days of global demand  is the lowest level of demand cover in more than 20 years.


Gary Sharkey, head of wheat at the National Association of British and Irish Millers, said global markets would remain finely balanced over the next 12 months. If we have another dry spring or summer in the US then we could be facing all sorts of issues, he said.


Analysts said flour and eventually food prices would rise if current wheat prices held. Analyst Andrew Saunders at Numis, the investment bank, said: Food producers will seek to pass this [price rise] on to the retailers and in turn consumers will bear the brunt of these higher prices with increased food prices.


Copyright The Financial Times Limited 2006