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Commodity Intelligence Report
February 2, 2009

Price Ratios Don't Favor Wheat

Wheat Production Situation January 2009


In September of 2008 FOB Gulf prices for wheat were down slightly from prices in 2007, while prices for soybeans and corn were much higher, indicating the incentives to plant wheat for the 2009/10 crop have diminished compared to a year ago.  Additionally, many market watchers have been reporting high input prices and lower availability of credit.  With continuing low stock levels and fairly high prices compared to previous years, there are still incentives for Northern Hemisphere farmers to produce wheat, although they are less compelling than a year ago.


September price ratios did not favor wheat planting for the 2009/10 marketing year.  The wheat/corn price ratio was 1.31 in 2008 compared to 2.06 in 2007 and a 5-year average 1.62.  The soybean/wheat price ratio was 1.60 in 2008 compared to 1.24 in 2007 and 1.52 for the 5-year average.  Wheat harvested area for major producers (China, India, Russia, Ukraine, European Union, United States and Canada) was up dramatically in 2008/09.  The price ratio levels as of September 2008 are an indicator that incentives to plant may be lower in 2009/10.

Current Situation for Major Producers


China produced a bumper crop of 113.0 million tons of wheat from 24.0 million hectares in 2008/09, with winter wheat accounting for more than 90 percent of total area and output.  According to Chinese government planting reports, winter wheat sown area for 2009/10 increased by an estimated 100,000 hectares (up less than 1 percent), with most of the increase occurring in the Yellow River basin and Northwest China.  Planting started in late September and was completed by the end of October.  Widespread rainfall during the planting season caused some fieldwork delays and germination problems but provided abundant soil moisture for emergence and tillering.   The Ministry of Agriculture reported that the wheat crop developed well and was in good condition when it entered dormancy in December.  Abnormally dry weather has prevailed in most winter wheat areas since November.  As of mid-January, a significant precipitation deficit (down 25 to 50 percent from normal) was recorded on the North China Plain, including parts of Shanxi, Shandong, Hebei, Henan, and Anhui provinces, but it is too early to know if the dryness will cause any yield losses.


Planting operations for India’s 2009/10 wheat crop are just about complete.  Sowing progress has been good.  According to Government of India’s December 28th sowing progress report, 26.0 million hectares have been planted so far, compared to 24.4 million hectares at the same time last year, an increase of 2.5 percent.  Favorable soil moisture and weather have enabled earlier-than-normal planting, and crop area is expected to increase by more than 1 percent.  Advanced sowing progress and the resulting vegetation growth and development are evident in vegetation index imagery.


Russia produced a record 63.0 million tons of wheat in 2008/09 following outstanding harvests for both winter and spring wheat.  Planting-progress reports indicate that sown winter-grain area in Russia increased by roughly one-half million hectares from last year despite declining domestic prices for all major grains.  Wheat typically accounts for about 80 percent of winter grain area, and winter wheat comprises 50 to 60 percent of Russia’s total wheat production.  Satellite-derived vegetation indices indicate that early-season conditions for the fall-sown winter crops are mixed.  Persistent dryness in the Southern District (which accounts for around 60 percent of the country’s winter wheat) likely hampered crop emergence and establishment, especially in the key Krasnodar territory, but favorable spring growing conditions can compensate for poor fall establishment of winter crops.  Spring wheat area has declined in recent years, and 2009/10 will hinge in part on the availability of credit for the spring planting campaign.


According to data from Ukraine’s State Statistical Committee, 6.5 million hectares of winter wheat were sown for 2009/10, against 6.7 million last year.  Winter wheat typically accounts for about 95 percent of Ukraine’s total wheat output.  Ukraine produced an estimated 25.5 million tons of wheat in 2008/09 (the highest harvest since 1990/91), but average output for the past five years is about 18 million.  Declining domestic prices – a result of the bumper 2008/09 crop combined with substantial carryover stocks from the 2007/08 harvest – contributed to the reduction in sown area for 2009/10, but it should be noted that sown area remains above the five-year average.  Planting and establishment conditions for the current crop were generally favorable.  Satellite-derived vegetation indices indicate that establishment was both better than average and better than last year.  Despite a gradual but steady improvement in agricultural technology over the past ten years, including increases in the use of fertilizer and certified planting seed, Ukrainian wheat yields have not exhibited a consistent upward trend.  Yields fluctuate significantly from year to year and weather remains the chief yield determinant.


The European Union (EU) has decided to eliminate its mandatory set-aside restriction that had been in place until last year, when it was temporarily suspended.  This is expected to lead to a large planted area for wheat again this year.  Most reports indicate wheat plantings in 2009/10 will be down slightly from the record area in 2008/09.  Input costs were high as farmers were making their planting decisions.  Additionally, rainy weather in the United Kingdom and Ireland made planting difficult, though there is a large planting window.  Some of the EU's more marginal land, particularly in the drier Mediterranean countries, may not get planted because of high input-cost.  Last year, cultivation of these lands was made feasible because of high commodity prices.


Corresponding to the lower international prices for wheat, analysts are expecting wheat output to be lower in the United States.  As of December 18, Doane Agricultural Services expected U.S. wheat acreage to be down by 4 million acres (1.62 million hectares).  The USDA forecast winter wheat seedings at 17.0 million hectares, down 1.69 million hectares on January 12, 2009.


In Canada, reports indicate that wheat plantings may be lower in 2009/10 than in 2008/09.  In its report released December 4, Statistics Canada announced winter wheat seedings at 0.92 million hectares, down from 1.13 million.  In addition to the price signal, harvest delays in the Prairie Provinces and Ontario made it difficult for farmers to seed winter wheat within the optimal planting window.


Background Situation


The world wheat situation in 2008 was characterized by high prices brought on by a growing demand for grains in general as there was strong demand for their use in producing alternative fuels, especially in the United States where government policies mandate the use of biofuels and encourage ethanol production.  Additionally, rising incomes in China, India and other developing nations brought about increasing demand for many commodities including petroleum.  This resulted in higher energy prices and increased incentives for biofuel production.  Added to this was increased activity by institutional investors such as retirement and hedge funds in commodity markets including grain futures markets.



Wheat prices were high enough in the summer of 2007 to encourage farmers to increase plantings for the 2008 crop, which was planted in the fall of 2007 and spring of 2008 in the northern hemisphere.  Prices peaked earlier for wheat than for corn and soybeans.  In September 2007, hard red wheat FOB Gulf averaged US$344 per ton, a month when many farmers make planting decisions.  This compares with US$207 per ton in September 2006 and US$146 in 2005.  Wheat prices peaked at an average FOB Gulf price of US$465 in March of 2008, which meant there was increased incentive to plant the spring crop as well, and to increase the use of inputs such as fertilizer and crop protection chemicals. 


With strong incentives to produce, world wheat harvested area was higher at an estimated 224 million hectares in 2008/09, up from 218 million in 2007/08 and 213 million in 2006/07.  The last of the 2008/09 crop is being harvested in Australia and Argentina as of January.  World production is estimated higher in 2008/09 as well, at a record 683 million metric tons, up from 610 million in 2007/08 and 596 million in 2006/07.  The world yield was also a record in 2008/09 at 3.05 tons per hectare, up from 2.80 in both 2007/08 and 2006/07.  In addition to the price incentive, favorable weather for high wheat yields characterized 2008/09 for the Northern Hemisphere, with the exception of a devastating drought in the Middle East from Syria to Afghanistan. 


Another indicator of incentives to produce is stock levels.  The ending stock levels of the major trading countries of Australia, Canada, United States, and the European Union combined averaged 47.4 million tons from 2001/02 – 2004/05, dropped to 37.6 million tons in 2006/07 and 27.4 million in 2007/08, as estimated by USDA.  Their ending stocks for 2008/09 are forecast up at 45.7 million tons.  This number reflects the current higher output for wheat.

Current USDA area and production estimates for grains and other agricultural commodities are available on IPAD's Agricultural Production page or at PSD Online.

For more information contact Paul Provance | | (202) 720-0873
USDA-FAS, Office of Global Analysis

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