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Global Weather Drives Up Wheat Prices by Scott Yates, Staff Writer Capital Press, August 3, 2007

PNW farmers prepare to collect winter wheat bounty

SPOKANE - The title is already taken to describe a horrific weather system in the Atlantic, but could "A Perfect Storm" also characterize what's happening to wheat prices?

Certainly, there are a lot of elements that go into an explanation of rising prices.

Joe Sowers, market analyst for U.S. Wheat Associates has a list of 10:

1. Wheat planted area taken over by corn and soybeans.

2. Canadian planting down 18 percent, the smallest crop since 1970.

3. World ending stocks drop to 30-year low.

4. Australia crop devastated by drought.

5. Argentine wheat crop fully committed.

6. Heavy rains deteriorate West European crop quality.

7. Drought hits Eastern Europe and Ukraine crops; weather damage in Russia.

8. North African drought; Morocco crop down 75 percent.

9. Ocean freight transportation rates reach new highs.

10. U.S. winter wheat crop misses production and quality expectations.

"They have come off considerably, so wheat can't expect support from corn. Wheat is sitting up here by itself," he said, noting the spread between it and corn is the now the widest since the early 1970s.

Although drought in Australia was the early signal that prices had the opportunity to skyrocket, it was too much rain elsewhere that sealed the deal. The Southern Plains, especially Oklahoma, was drenched. At the U.S. Wheat meeting in Kalispell, Mark Hodges, executive director of the Oklahoma Wheat Commission, reported on 38 locations in his state that had received from 12 to 19 inches of rain in the month of June.

Too much rain was also the problem in Western Europe, where what was going to be a good crop got soaked at the wrong time. Eastern Europe was another story. There was drought in the Ukraine, a country that has served as a spoiler in the wheat price sweepstakes in the past.

All that news has sent European wheat prices to record high levels, including $7.70 a bushel in France. EU intervention stocks are sold out, Sowers said. There is no more buffer. Can prices go higher? Well, Russia isn't in bad shape and Kazakhstan also reports a good crop. China recently came out with great numbers, 5 million metric tons better than last year and India's crop also looks good.Sowers said it all comes down to the basics: supply and demand. And right now, the U.S. has the supply.

"Have you seen the sales weeks we've been having? They're amazing. Two million metric tons export sales. It's the most we've sold since the mid 1990s. The importers have no where else to turn."

Tom Mick, chief executive officer of the Washington Grain Alliance, said it's possible that could change if Australia has a good harvest.

"It's not out of the realm of reality," he said for the country to bounce back from a drought-plagued 10 million metric ton crop to 24 million metric tons. "It's been done in the past."

The question, Mick said, is not how much Australia's production increases, but whether it will be enough to satisfy world demand with everything else that's going on around the globe.

"Everything is coming together at the same time," he said. "I was at a buyers conference in Indonesia. There were about 200 people in attendance and the mood of the buyers was depressing. They are faced with high prices worldwide and they are also faced with high ocean freight costs. The logistics are killing them," he said.

So why don't the businesses raise prices? Mick said that's possible in the developed world, but in the developing world, many governments still control the price at which wheat is sold. Officials want prices low so the poor can afford the food staple. That makes it difficult for the millers to raise prices to the point they can recoup the increased cost of the raw product.

"I would expect to see more of the flour mills seeking the cheapest wheat. It's a tough game for them from their point of view, but right now, our farmers are really happy," Mick said.

But for how long? Mick said he can superimpose an overlay of the price rise in 1996 with the one that's been occurring this year and they match up. Eleven years ago, however, the high prices lasted only briefly and fell dramatically following the next harvest.

"History does usually repeat itself, but there are other factors associated with this. People I talk to think prices will remain strong until October, when we have a good idea of the Australian crop. That could have a negative effect on prices, but some exporters and grain handlers feel that may be a three-month occurrence and then prices rebound again."

Although there are farmers who are forward contracting their crop, Mike Krueger, editor of the White Wheat Report and a Portland-based commodity trader, suggested they would be better served to buy Crop Revenue Coverage protection. The base price level for the revenue and production insurance product has yet to be established. It is derived from the Aug. 15 to Sept. 14 average daily settlement price. The price will be announced Sept. 20.

"That Portland base price might be in the $6.70 neighborhood and if you're using 85 percent (coverage), that would give you a $5.70 (a bushel) Portland hedge, which is more than adequate for most operations. Why forward contract? If your crop shrinks, the way CRC works, you are not in trouble. In other words, your production and price can go down and your hedged both ways."

Krueger said he always factors crop insurance into his clients operations, but this year he's especially encouraging farmers to give CRC a look.

"It works against price. It works against meteors or anything that happens," he said. "If you are ever going to look at the crop insurance program, this would be the year."