Nogstradamus: The Future For Wheat

We're slap bang in the middle of harvest and prices are depressed. No huge surprises there then really, but what does the future hold for wheat?

It looks like there could still be some more pain before we get any gain, unfortunately. Last year's post-harvest lows weren't set until October, and the way things are at the moment, I don't think that it would be unreasonable to suggest that something similar might happen again this year.

Is there any light at the end of the tunnel for wheat? Whisper it quietly, but I think that there might be.

One thing to consider is that our Eastern European chums, who were ever so keen to jump on the wheat gravy train two years ago, are not quite so enamoured with cereal production now.

In fact, various reports I am reading suggest that farmers in Ukraine, Bulgaria, Romania, Russia etc are royally pissed off that the gravy train came to a shuddering halt so soon after they'd piled aboard.

In Bulgaria, the cost of producing wheat for this harvest was around BGN 270-280, according to their Grain Producers' Association. That's equivalent of EUR 140/tonne. With prices where they are now only farmers who can produce at least 350-400 kg of wheat per decare will be able to survive, they say. With an average yield of 295 kg/decare this year many Bulgarian farmers face bankruptcy, and plantings are likely to be sharply lower for the 2009/10 crop.

It's a similar situation in Romania where wheat production costs this year are said to be around RON 1,800 per hectare, or RON 720/tonne. That's around EUR 170/tonne. Around a third of production costs come from state subsidies, leaving farmers to fund around the remaining EUR 115/tonne themselves, with wheat on the domestic market currently only worth around EUR 95/tonne. A government-backed scheme, similar to intervention, has been swamped with offers of grain that there isn't enough space to store in the licensed silos, or enough government money to pay for.

Fast forward to Ukraine, where the cash-strapped government is also attempting to shore up prices by buying domestic grain with money it hasn't got. The law of the land says that agri-giants like Landkom can reclaim VAT paid on grain that was exported and not consumed in the country. Unfortunately for the Ukraine government (and Landkom) it simply hasn't got the money on last year's record exports, let alone this year's. The country with the lowest credit rating in Europe has, to put it bluntly, run out of cash. So there's little in the way of encouragement here to plant wheat again for next season, whether your big or small.

A contact in Russia predicted some time ago that Russian grain production would be down in 2009 and then down again for the 2010 harvest, due to a similar combination of circumstances. The situation here has been exacerbated by drought this summer, leaving farmers and agricultural companies on the brink of bankruptcy after borrowing heavily to fund this season's "sure thing" harvest.

In the current financial crisis, where is the money going to come from to pay for planting for 2010? With market prices currently below the cost of production, it's a bit like doing 125% mortgages on property in Eastern Europe. Who'd want a slice of that cake?

Meanwhile lurking in the wings we have El Nino. India's monsoon season has produced 29% less rain than normal to date (June 1st - Aug 11th), with only six weeks to go until the rainy season ends. Here, around 60% of the land is totally rain-fed, the remaining 40% relies on irrigation from reservoirs normally filled with abundant monsoon rains. This is the second largest producer and consumer of wheat in the world.

India, it could be argued, were partly responsible for getting the last big wheat rally going by virtue of their aggressive international buying in early 2008. They've already lit a fire under the sugar market, if the rains hold off for the next six weeks, and wheat prices into the autumn continue to discourage winter sowings in Eastern Europe things could look a lot different six months from now.