Milling & Baking News - June 15, 2010 - 7

Editorial



Attempt to explain $1.50 wheat price mystery

nyone looking for a wheat market mystery outgo of those three earlier years by nearly 200 milthat merits pondering ought to think hard lion bushels. Competitors for export markets, notably
about how to explain why current wheat the states of the Former Soviet Union with easy access
prices appear to be $1.50 per bushel higher than to the Black Sea, face no worrying setbacks in their
what would be expected in relation to earlier years. efforts to build upon their newfound role as major
That substantial difference, equal to more than $3 wheat exporters.
per hundredweight of flour, represents the national
Government programs, another past source of subaverage farm price for wheat in the 2009-10 sea- stantial support for prices through a variety of chanson as well as the latest forecast for 2010-11, com- nels, are largely absent. The direct payment rate, based
pared with prices prevailing in the three crop years on normal yields, has been at 52 cents per bushel for
ended in 2005-06. Supply-demand calculations for the entire period under review. While most studies inthose three years might be regarded as consider- dicate that wheat farmers will be more inclined than
ably more bullish than was the case in the year just other crop producers to choose the ACRE program
ended and is in the outlook for the season that be- (Average Crop Revenue Election) in sign-ups this
gan in June. Yet, farm prices for
year, as compared to staying with
Absent fundamental
wheat in 2009-10 averaged $4.90
the program of direct payments,
explanations as well as
per bushel, with the projection
marketing loans and counter-cyeconomic factors to account
for the new year very similar, in
clical payments, the impact here is
for the current level of
contrast to the $3.40 and $3.42
most likely in firm prices for wheat
wheat prices leaves standing
national averages ruling in those
real estate. But the likely effect of
the most central of all
three earlier years.
all of this on market prices in the
assessments - that the
This premium of an additional
market itself is never wrong. near term is minimal, especially
44 per cent collides with supplywhen direct payments are made
demand figures that accentuate the mystery. When without regard for prices received.
it comes to the ending stock-to-use ratios, the lower
It has become customary in seeking to understand
the ratio is, the more bullish the connotation. The the rationale for current wheat prices to cite two incurrent ratio for 2009-10, at 46.8 per cent, is nearly fluences beyond supply-demand - the role played
double the ratios computed at the close of the three by commodity index funds as a strengthening force
seasons beginning with 2003-04. In size, the actual and the prospect for currency value fluctuations that
ending carryover in 2010 was two-thirds greater would move demand in a price-affecting way. Withthan the largest carryover in those three years. As out dismissing the net bullish effect of index funds
if the weight of these numbers was not sufficient to that count ownership of cash wheat as holding a basic
press down on prices, the 2009-10 wheat supply was commodity position, buying of index funds by invesabout 200 million bushels larger than in any of the tors has been more restrained of late than it was durearlier seasons.
ing 2007-08 to the point that doubts are cast upon its
From a demand point of view, the data are also rela- impact. Absent fundamental explanations as well as
tively bearish. Total annual disappearance will lag the economic factors to account for the current level of
pace of the earlier period by as much as 300 million wheat prices leaves standing the most central of all
bushels. Export surprises, which in the past have of- assessments - that the market itself is never wrong.
ten provided enough fireworks to set off a price ex- As a result, speculative fervor joined by a willingness
plosion, seem totally unlikely. Shipments in 2009-10 to respect the strength of wheat foods in the global
were the smallest in several decades and lagged the diet may be sufficient to explain this mystery. MBN

MORTON SOSLAND, EDITOR-IN-CHIEF
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Milling & Baking News, 4800 Main Street, Suite 100, Kansas City, Mo, 64112
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