Double blow puts wheat at record peak

By Javier Blas in London FT

Published: December 18 2007 02:19 | Last updated: December 18 2007 02:19

Wheat prices on Monday surged to fresh all-time highs above $10-a-bushel amid fears that strong demand from emerging countries will eat into depleted global cereal inventories.

The market gained additional support after Argentina confirmed that its wheat crop had suffered heavy losses after frosts last month hit the Buenos Aires region, which makes up more than 60 per cent of the country’s production.

Argentina is the world’s sixth largest wheat exporter, accounting for about 7 per cent of the market, according to Deutsche Bank.

Extreme weather this year damaged the crops of other leading exporters, including Australia and Ukraine.

The CBOT March 2008 futures contract, that on Monday became the market’s benchmark after the expiration of the December contract, jumped to an all-time high of $10.09½ a bushel, after hitting its 30 cents daily trading limit.

It was later trading at $9.80 a bushel, up ½ cent on the day.

Tobin Gorey, a commodity strategist at Commonwealth Bank of Australia in Sydney, said that the seriously depleted harvest in Argentina had acted as a “catalyst” for the price jump.

“There is not an obvious stop for the price. The market is very tight,” Mr Gorey said.

Strong demand and tight supplies have nearly depleted cereal stocks.

US wheat inventories are set to fall to a 60-year low at the end of the current crop season, while global stocks, at 9.3 weeks of consumption, have not been so low since at least 1960, according to the US Department of Agriculture.

Rising agricultural commodity prices are boosting inflation worldwide, constraining the ability of central banks to mitigate the slowdown in their countries’ economies.

Forward prices for the 2008 summer crop fell because of hopes that current record prices will push farmers to seed more wheat at the expense of other agriculture crops. CBOT July 2008 was at $7.95 a bushel and September 2008 was at $7.85 a bushel.

Analysts say rising consumption in emerging countries, particularly in China and India, will support prices well above the past five years’ average of about $4 a bushel.

Christopher Brodie, of commodities hedge fund Krom River Partners in London, said that the wheat price rise reflected a structural change in demand for agricultural commodities from emerging countries.

“The rise in poor countries’ income from $1 to $2 per capita per day triggers the largest increase in an individual’s calorific intake – what is known as the second dollar theory,” Mr Brodie said, referring to the large increase in demand in countries such as Vietnam that have reduced poverty significantly in the past few years.

Rising incomes in emerging countries have boosted meat and dairy consumption, increasing demand for agricultural feedstock.

The UN’s Food and Agriculture Organisation estimates that China’s meat consumption per capita per year has risen from 31 kilogrammes in 1990 to about 60kg.

Copyright The Financial Times