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Russia’s announcement on August 5 that it was imposing a temporary ban on wheat exports sent shockwaves through commodity markets, with CBOT wheat front-month future prices climbing to nearly US$280 per tonne.
However, this still remains far below the prices reached in March 2008 when average wheat prices reached US$440 per tonne.
Interestingly, despite the extent of the damage caused by the wildfires to the Russian crop, there is little evidence to suggest that it will have a significant impact on global wheat production over the 2010/2011 season.
Furthermore, wheat front-month prices have since gone back down to levels comparable to before Russia announced its export ban, currently standing (17 August) at around US$250 per tonne
From a production perspective, according to the United Nations Food and Agriculture Organisation’s (FAO) World Wheat Balance report, released on 4 August, global wheat output will reach 651 million tonnes during the 2010/2011 season. This is around 5% lower than the previous season.
The EU and China are the largest wheat producers, accounting for around one third of total global output. Russia’s production represents less than 10% of total global output, according to the International Grains Council’s sources.
At this stage, the final damage caused to Russian wheat crops is still being evaluated. Some estimates from industry sources suggest that as much as a third of the Russian wheat crop for the 2010/2011 season could have been lost in the fires.
While such a loss is significant at domestic level, it represents less than 3% of global wheat output. As such, the real impact on global supply is looking fairly limited.
Wheat price movements, however, are as much related to production as to existing stock levels. While production of a specific commodity can be relatively weak at a specific point in time, stocks can always be used by suppliers to satisfy current demand. This means that a relatively poor crop does not translate automatically into a price increase.
According to FAO estimates, wheat stocks in 2011 will stand at a similar level to the previous season – 196 million tonnes (2009/2010) versus 188 million tonnes (2010/2011). Even factoring in a drop in production of around 17 million tonnes (30% of total Russian wheat crops), adjusted stock levels will likely remain only slightly lower than 2008/2009 levels of 178 million tonnes.
Global wheat prices declined by 20% between July 2008 and June 2009. This drop was prompted by weak demand for bakery products and the worsening of economic growth expectations worldwide.
Overall, a relatively healthy position for wheat stocks is partially related to weak global demand for wheat-intensive bakery products like bread. Total volume sales of bread are predicted to grow by 1.3% and 1.2% in 2010 and 2011, respectively, according to Euromonitor International’s projections.
Maturing market demand and mounting consumer concerns about obesity are predicted to constrain future demand for bread in developed regions like North America, where total volume bread sales are projected to decline by 1% over the 2010-2015 period.
This decline will be even more pronounced in Eastern Europe, where bread sales are projected to drop by 2% over the same period. Russia will be one of the countries leading this decline, with total bread volume sales projected to drop by 4% over the 2010-2015 period.
The decline in bread consumption in Russia will be linked to the rapid westernisation of consumer culture in urban areas as an increasing number of middle-class Russian consumers limit their calorie intake or simply turn to less wheat-intensive products such as snack bars.
Global demand for other wheat-intensive packaged food categories, such as breakfast cereals, is projected to remain relatively stagnant. Global breakfast cereal sales are forecast to grow by a compound average rate (CAGR) of just 1% in total volume terms over the 2010-2015 period, according to Euromonitor International’s projections.
As in other bakery categories, breakfast cereal sales in North America are predicted to remain stagnant from 2010 to 2015. Meanwhile, sales in Western Europe are projected to grow by a mere 4% in total volume terms over the same period.
Research shows that low birth rates will constrain the children’s segment while mounting competition from more convenient snack bar formats in the adult segment will slow overall consumer demand for breakfast cereals in developed regions.
Despite a stronger performance in emerging regions, breakfast cereals’ relatively high retail unit prices will prevent them from becoming mainstream in markets such as China, India or Pakistan, especially beyond relatively affluent urban areas.
With wheat stocks still predicted to remain close to 2008/2009 levels and demand for wheat-intensive products likely to be weak, strong wheat price fluctuation linked to supply/demand imbalances is fairly unlikely in the short term.
That said, stronger than predicted demand in emerging regions and/or relatively poor crops in specific countries could push up wheat prices close to 3-5% between September 2010 and the end of 2011.
Any price movements going beyond this range could be driven by other factors. For example, a general economic recovery is picking up pace in Asian markets, especially in China, India and Indonesia.
Moreover, the urban population in these countries – which accounts for the bulk of bakery product consumption, especially packaged formats – is predicted to grow by 140 million between 2009 and 2014, according to Euromonitor International’s Countries and Consumers database.
Meanwhile, in the Middle East and Africa, where bread remains a heavily subsidised staple food item, the total population is projected to grow by 140 million between 2009 and 2014.
Rapid economic and demographic growth in emerging regions, alongside strong consumer migration from rural to urban areas, has resulted in the increasingly widespread opinion that food shortages will lead to a strong increase in commodity prices in the short term.
While this could be the case in the medium to long term, real demand projections for 2010/2011 fail to support this argument. Rather, research suggests that stronger demand will affect the availability/affordability of food staples in different ways.
For example, demand for bread is likely to remain stagnant at global level because increasingly health- conscious consumers in Europe and North America will reduce their daily intake, thanks mainly to concerns about obesity and weight management.
This shortfall will slightly exceed the predicted increase in bread consumption in emerging regions over the 2010/2011 period. Meanwhile, other wheat-intensive categories like breakfast cereals will fail to match the actual population growth expected in Asia-Pacific and the Middle East and Africa.
This is because they will remain too expensive for the vast majority of the population or because they will simply struggle to become an engrained part of the local diet.
All that said, the early August price hikes seen on international wheat markets are testament to how jittery trading in global food commodities is becoming. The prevailing mentality of so-called “food insecurity” has made wheat, alongside other food commodities, prone to speculative attacks. These are becoming more and more frequently linked to quickly shifting market expectations than to any structural changes in the global supply/demand balance.
As such, only a moderate worsening of current production projections in Australasia or North America could see a recurrence in the price hikes seen recently among wheat traders. Any increases doubling or even tripling the suggested 3-5% price rise mark should therefore not be discarded in the wake of natural disasters taking place in major wheat producing areas.
Euromonitor International suggests that, in view of the uncertainty set to pervade the wheat market in 2010 and 2011, wheat manufacturers should be wary of short-term supply agreements. The latter may be factoring in speculative movements that do not entirely reflect real fluctuations in supply or demand.
Linking official wheat production projections to forecast consumer demand for wheat-intensive bakery products stands to offer a closer fit in assessing commodity price movements over the short to medium term.