December 27, 2007
U.S. Wheat Associates is the industry’s market development organization working in 90 countries on behalf of America's wheat producers. The activities of U.S. Wheat Associates are made possible by producer checkoff dollars managed by 18 state wheat commissions and through cost-share funding provided by USDA’s Foreign Agricultural Service. For more information, visitwww.uswheat.orgor contact your state wheat commission.
In This Issue:
1. New Realities in the World Wheat Market
2. Energy Bill Should Boost Grain and Oilseed Demand
3. U.S. Wheat Importers Planning Ahead
4. USW Partner Organization Activities for 2008
PDF Version:
Web Link: Wheat Letter - December 27, 2007
1. New Realities in the World Wheat Market
In the face of fundamental changes in the global wheat market, buyers and processors should plan for a new, higher trading range for the world’s supplies over the next few years. That was the message Alan Tracy, President of U.S. Wheat Associates, shared in the opening address to an estimated 500 participants in the Middle East & Africa District Conference & Expo of the International Association of Operative Millers (IAOM), Dec. 9, 2007 in Muscat, Oman.
“Consumer demand for food is growing, crops are competing for planted area, speculators are more active in commodities and trade barriers are falling,” Tracy said. “These forces should push U.S. wheat futures prices into a new range of around $6.00 or more per bushel or about $220 per metric ton, assuming favorable weather and new crop production grows as expected. If there are significant production problems, prices are likely to shoot up again as they have this year.”
Noting that the recent weather-driven spike in world wheat prices has taken the lion’s share of attention, Tracy pointed out that rising population and more disposable income in developing countries is pushing a steady increase in cereal grain demand. “At the same time, we see a gap between use and production,” he told the conference participants. “The world has produced more wheat than we used in only two of the last nine years.”
The pressure on world wheat stocks is likely to stay fairly strong, Tracy said. “Demand for vegetable oil, feed grains and meat is rising even faster than for food grains. Factor in the biofuels boom and transgenic trait benefits to corn, soybean and canola producers and you can see that, at least for now, wheat can only compete for hectares with higher sustained prices.” For more information about the potential impact of biofuels demand on wheat prices, see the following article, Energy Bill Should Boost Grain and Oilseed Demand.
In turn, the run-up in agricultural commodity prices and the advent of round-the-clock electronic trading has attracted investors. While it would not be possible for commodity producers and buyers to use the futures and options markets to manage price risk without speculators, the high volume of speculative trading appears to be sustainable. “The people who grow the grain and the people who actually use it are no longer the only ones determining prices,” Tracy said. That means wheat prices will remain volatile as investors move in and out of their positions.
Finally, Tracy discussed the significant shift away from protectionist trade policy and its importance to wheat buyers. Bilateral and multilateral agreements, driven by growing evidence that trade is an engine for economic development, are breaking down trade barriers. Tracy said trade liberalization boosts world economies, which in turn boosts demand for food.
Tracy also suggested that wheat buyers should stay in touch with local USW representatives who can help them navigate these uncharted waters. As the organization representing wheat producers, USW works to add value to high-quality U.S. milling wheat by providing trade service, technical assistance, information and market analysis to buyers and processors outside the U.S.
In addition to Tracy’s address opening the educational session, USW’s Regional Technical Director Peter Lloyd shared ideas with IAOM members on how to extract more value from milling wheat. Later in the conference, USW Vice President John Oades presented a detailed look at U.S. wheat supply, demand and quality. Click here or visit www.uswheat.org/wheatLetter and select December 27, 2007, to see all three presentations.
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2. Energy Bill Should Boost Grain and Oilseed Demand
by Joe Sowers, USW Senior Market Analyst
The Energy Independence and Security Act of 2007 signed into law by President Bush last week will substantially increase U.S. biofuels production over the next several years. The energy bill has the potential to support demand and, therefore, prices in the U.S. grains and oilseeds markets, including wheat. Although wheat is not currently a biofuels feedstock in the U.S., the increased biofuels mandate should heat up the battle for acres.
The new law requires that 136 billion liters (36 billion gallons) of biofuels be produced within 15 years. Of that amount, 57 billion liters (15 billion gallons) are slated to come from corn-based ethanol by 2015, a mandate that will require 68 percent more corn than is currently used to make ethanol in the U.S. Most of the balance ultimately will have to come from advanced biofuels, such as cellulosic ethanol or other sources. The law also includes a mandate for production of nearly four million liters (1 million gallons) of biodiesel by 2012.
Corn consumed by ethanol production in the U.S. is expected to increase from 81 million metric tons (MMT) this year to 136 MMT by 2015. Some of the increased corn demand will be met through increased productivity with corn yields in the U.S. growing at an average rate of two percent per year. The corn starch ethanol industry will also have to bid for its supply from the export market of 62 MMT and the domestic market of 260 MMT. When corn increases in price relative to wheat, livestock feeders can turn to wheat as a feed ingredient.
It is unclear which oilseed will be most in demand under the new biodiesel mandate. Soy biodiesel is well-known but canola has higher oil content than soybeans. North Dakota is the top canola producing state in the U.S. It is also by far the largest hard red spring wheat producing state and competes with Kansas as the nation’s top wheat producing state overall. Even before the new energy law was signed, producers in North Dakota and Montana were expected to plant more canola in 2008.
3. U.S. Wheat Importers Planning Ahead
Mid-way through the 2007/08 marketing year, wheat importers have already made commitments to purchase more than 1 MMT of next year’s U.S. wheat crop. This level of commitment to new crop wheat at this point in the marketing year has only been exceeded three times since 1979/80. Source: USDA.
4. USW Partner Organization Activities for 2008
The entire U.S. wheat supply chain is actively engaged in helping customers use its product as effectively and efficiently as possible. USW works with several public and private organizations to provide valuable educational services to overseas wheat buyers and processors. Two of those partners have published information about educational opportunities available in 2008; a partial list of courses is included below. Look for more information in future issues of Wheat Letter.
International Grains Program, Manhattan, Kansas
The mission of the Kansas State University International Grains Program (IGP) is to educate foreign business leaders and government officials about U.S. grains and oilseeds through technical-training and assistance programs in storage and handling, milling, marketing and processing.
Grain Purchasing Short Course, April 14 - 25, 2008, focuses on the mechanics of purchasing raw materials and features detailed discussions of cash and futures markets, financing and ocean transportation.
Flour Milling, June 9 - 20, 2008, provides a detailed study of the major principles of modern flour milling and management. Recent advances in flour-milling technology are also covered.
For more information, contact your local USW representative or visit the IGP Web site at http://www.k-state.edu/igp/.
Northern Crops Institute, Fargo, North Dakota
The Northern Crops Institute (NCI) supports regional agriculture and value-added processing by conducting educational and technical programs that expand and maintain domestic and international markets for northern-grown crops.
Pasta Production and Technology, April 15 - 17, 2008, provides fundamental and applied aspects of manufacturing extruded and sheeted pasta products. Raw material quality criteria, specifications, and processing variables and their impact on final pasta product quality are presented in detail. Quality tests employed in the evaluation of raw materials (wheat, semolina, flour) and finished products are also demonstrated. Participants will do hands-on pilot-scale pasta processing.
Advanced Grain Procurement Strategies, May 12 - 16, 2008, addresses risk management tools and marketing strategies that assist buyers in competing in the international grain business. Participants will learn advanced techniques in commodity merchandising through lectures by authorities on futures market theory.
Grain Procurement Management for Importers, September 8 - 17, 2008, focuses on the mechanics of grain merchandising through expert lectures on cash and futures markets and international grain merchandising.
For more information on NCI and its educational services, contact your USW representative or visit the Web at http://www.northern-crops.com/education/education.htm.
Happy New Year from everyone at U.S. Wheat Associates!
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