Wheat prices likely to fall as demand slows

Wheat futures, which have risen about 25 per cent during the past six weeks, are likely to fall in the coming months due to poor demand from both the feed market and overseas buyers.

"We should probably continue to trend lower trying to attract increased demand either into the domestic market or into the export sector," said Shawn McCambridge, analyst with Prudential Bache Commodities.

Wheat futures have rebounded after falling to $4.55 (Dh16.71) a bushel in early December, 66 per cent off the record high of $13.34-1/2 reached in February 2008. Fund buying and spillover strength from a rally in the soybean market have boosted prices.

"The fundamentals do not even support the current price level," McCambridge said. "The pace of demand could not get much slower."

The recent rally was not based on any renewed buying interest from the livestock market, which continues to struggle due to poor profit margins, or the export sector. Most overseas wheat buyers have been getting their supplies from countries that offer lower-priced wheat.

A year ago, export demand for US wheat was firm due to tight supplies.

But US wheat faces headwinds such as a firm dollar, making it more expensive on the world market. Bin-busting harvests in many wheat-producing countries produced a glut of supplies, adding further pressure.

"Last marketing year, essentially we were the only primary seller," said Ian Flagg, market analyst for US Wheat Associates, which promotes US wheat to the export market.

"The stock situation was the complete opposite of what it is now. The dollar was the complete opposite of what it is now. We had kind of a perfect storm (last year) of everything going in favour of higher US wheat prices."

The US Agriculture Department on Monday forecast 2008/09 US wheat ending stocks at 655 million bushels, up 32 million from its December outlook and above the average analyst estimate of 608 million bushels.

USDA also lowered its wheat consumption estimate for the 2008/09 marketing year. The ending stocks and usage numbers more than offset the nine per cent decline in US winter wheat seedings. Fears of damage to the US winter wheat crop caused by sub-zero temperatures across the US Midwest and Plains regions, also have done little to boost prices.

CBOT wheat futures have fallen more than eight percent since the USDA report was released.

Current prices are threatening farmers' profitability amid high input costs for everything from fertiliser to land rents. If prices do not rebound, spring wheat acreage could drop sharply this year.

"It (the price) is going to have to move a little because right now it really does not pencil out, if you look at all the inputs," said Richard Baylis of Miles Opti-Crop, a crop consulting and management firm.

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