Future Shock - Decreased Grain Supply, Increased Cost

[Astronuc]

I heard recently that Wheat (grain) production decreased due to drought in Australia and other areas, e.g. midwest US. Several countries have curtailed or reduced export and in some cases are now importing. At the same time, the cost of production has increased, in part due to increased energy (e.g. oil and gas) costs. At the same time, farmers are now looking at biofuels.

It bears watching to see what happens with the world's food supply.

Here is some background and resources for those interested:


http://cropwatch.unl.edu/archives/2006/crop22/wheat_marketing.htm
Sept 22, 2006 - Tips for forward marketing wheat for 2007, 2008

Wheat prices have hovered near $3 a bushel for the past several years. With prices jumping to more than $5 a bushel in several areas this summer, many Nebraska farmers looked down the road and locked in these prices for a portion of their 2007 and 2008 crops as well.

Several options are available for producers looking at pricing either the 2007 or the 2008 crop, including cash forward contracts and futures contracts. As we look at prices today, there are still some opportunities to lock in prices above $4 per bushel.

As with all opportunities, there are some inherent risks that producers need to consider when forward pricing wheat. First, consider the risky nature of dryland wheat production in Nebraska. Any crop that is entirely rain dependent has seen its ups and downs in terms of yield over the past several years of ongoing drought. Coupled with the potential for hail, disease and other perils, the ability to deliver the amount of wheat promised is always risky. Second, the pricing mechanism is critical. Have you chosen to price on a forward contract with the local elevator, use another tool with a local elevator, or use the futures market? As we look at production risk, it has historically been a good rule of thumb not to market more than half of the expected “average” yield. This allows the farmer to cover his contracts even if yields decrease dramatically. The real risk here occurs when prices run up to levels higher than the contract price and a producer has a poor crop. Having less wheat than the contract calls for and prices higher than the contract can force the producer into the market to purchase expensive wheat to be delivered for lower prices to fulfill a contract commitment. The simplest way to protect against this is to buy crop revenue or revenue assurance insurance on wheat production and not market more than the amount insured.

http://wheatbook.unl.edu/

http://nue.okstate.edu/Crop_Information/World_Wheat_Production.htm

http://en.wikipedia.org/wiki/International_wheat_production_statistics

http://www.wheatworld.org/

http://www.igc.org.uk/en/default.aspx
http://www.igc.org.uk/en/gmrsummary/marketreport.aspx

The steep rise in world grain and oilseed prices
during the past month, to levels last seen in
1995/96, reflected increased concerns about
global supplies, especially for wheat. The sharp
deterioration in crop prospects in drought-affected
Australia was the main trigger, against a
background of declining forecasts of global stocks.
While the rise in prices was likely to ration
demand, especially in the feed sector, immediate
market supplies were further restricted by the very
slow pace of farm deliveries in a rising market.
Wheat export prices climbed by between $20 and
$30 during the month, with all markets responding
to global supply concerns in the wake of muchreduced
crop forecasts for Australia. Steps taken
in some countries to stem the rise in domestic
prices and ensure adequate local supplies also
had an impact, with Ukraine, for example,
introducing export quotas.

http://www.igc.org.uk/en/aboutus/default.aspx
http://www.igc.org.uk/en/events/conference.aspx

The 2007 IGC Grains Conference is scheduled for Tuesday 12 June, in London. This important annual event brings together the world’s sellers, buyers and end-users of grain who will hear several leading speakers set out their views on the key factors likely to shape the industry’s future. Recent grain and oilseed market developments, against a background of strongly rising biofuels use and tightening grain supplies, have underscored the need to fully understand the issues driving global demand and trade. The Conference will assess the outlook for 2007/08 and beyond on the basis of a number of industry-specific presentations. In addition to discussing the latest issues relevant to wheat and coarse grains markets, participants will also learn about important new developments in the rice and oilseeds sectors.

 

[Bystander]

Worried about your next meal? Wheat was two bucks in '48, bottomed around a buck in the 50s, peaked at five or six in the 70s. So what? Thats 10 cents of wheat in a one pound loaf of bread --- bread was 15 cents a loaf in the 50s, and 2 bucks now. Don't confuse the manipulations of CBOT with production costs. Boycott Harvard.