GLOBAL wheat prices have steadied in recent weeks after a savage two-month slide, but the preconditions are in place to underpin a rally early in 2009, and if production doesn't meet high expectations it could be a very sharp rally.
Against a backdrop of a general decline in the value of all asset classes, wheat prices slumped as the market focused on a sharp increase in global wheat production, with the US Department of Agriculture on Monday estimating a 12 per cent on year increase in output in 2008-09 to a record 682 million tonnes.
But the market may have overlooked "the missing salient fact" that demand is continuing to grow because the global population is expanding, says Mark Martin, a risk management adviser and director at Australian commodity manager MarketAg.
USDA estimates demand for wheat will grow 6.2 per cent on year in 2008-09 to 657 million tonnes.
"With that growing demand and tight stocks, it wouldn't take too much for a production hiccup to cause an explosion in prices," Mr Martin told Dow Jones Newswires.
Australia's most active wheat futures contract - ASX January - settled yesterday at $268 a tonne. That's up from a low of $258 late October but still well below a recent high of $392 on August 21 and a still higher peak of almost $450 in late February.
"If we have a serious weather problem, or a scare...you'd see a $200 lift in these prices," Mr Martin said.
He isn't alone in seeing a solid floor in place for wheat prices.
In analysing the USDA estimates, Merrill Lynch said that despite expectations of higher output of wheat, soy and corn in 2008-09, inventories are projected to remain at low levels.
Wheat stocks - at their third-lowest level in 35 years - should remain near record lows, it said.
"With grain demand expected to grow at 3-4 per cent in the coming year, inventories at historically low levels and limited arable land available for expansion, grain markets are expected to remain tight in the near to mid term," Merrill Lynch's analyst Mario Maia wrote.
"We expect tight market conditions to support grain prices above historical levels.”
In order to meet demand, increase productivity and improve land use efficiency, larger amounts of agricultural inputs will have to be applied, Mr Maia said.
The United Nation's Food & Agriculture Organisation warned in its biannual Food Outlook report that a prolonged financial crisis could adversely affect plantings of various crops globally and potentially lead to an even more severe price hike in farm commodities next year than was seen earlier this year.
"The financial crisis of the last few months has amplified downward price movements, contributed to tightened credit markets, and introduced greater uncertainty about next year's prospects, so that many producers are adopting very conservative planting decisions," one of the report's authors, Concepcion Calpe, said last week.
This was amplified yesterday by Abdolreza Abbassian, the Secretary of FAO's Intergovernmental Group on Grains, who said that while attention is distracted by the international financial crisis and the drop in grain prices has taken the urgency off of dealing with soaring food prices, a new, more severe, food crisis is looming.
"We don't have stocks - no security against production disruptions," he said in an interview with Dow Jones Newswires.
MarketAg's Mr Martin said that wheat is one of a number of agricultural commodities whose charts suggest prices are forming a base. After hitting its $258 low on October 23, ASX January wheat traded up to $285 on October 28 and this month traded in a range of $260-$275.
As for the future of prices, "you'd have to say there's 10 per cent to 20 per cent risk to the downside and an 80 per cent to 90 per cent risk to the upside," Mr Martin said.
Richard Koch, managing director of Perth-based marketing advisory service Profarmer Australia, is more circumspect, in part reflecting a rebuilding of global wheat stocks, saying "the upside potential outweighs the downside."
"The best chance we have for a recovery in wheat prices is for Black Sea selling to reduce, that's been the overwhelming influence on grain markets in the past couple of months," he said today.
Until outside markets show signs of stabilising, it's hard to make a case for grain prices to push too far away from where they are now, he said.
That said, probably early next year in the northern hemisphere spring, the battle for acres between competing grains should underpin a recovery in prices, but these likely won't "blow off the charts" so much as just grind higher, Mr Koch said.
Dow Jones Newswires