Wheat price surge raises inflation fears

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Chris Flood, FT Syndication Service
LONDON: A fall in US inventories of wheat to a 60-year low drove prices of the grain sharply higher late last week to a fresh record, intensifying fears of rising global food price inflation.
US wheat futures - global benchmarks for the grain - have jumped by their daily trading limit each day this week. Prices for Minneapolis wheat, the US variety most suitable for making flour, rose 10.7 per cent on the week, extending its price surge since the beginning of the year to 50 per cent.
"We are in uncharted territory," said James Bower of Bower Trading. "The market is desperately trying to tell global producers that we need more acres for wheat production."
The price gains came after the latest update from the US Department of Agriculture fuelled concerns over low inventory levels. The USDA reduced its estimates for wheat stocks at the end of the 2007/08 marketing year to 272m bushels, compared with its January estimate of 292m bushels.
"The US has sold too much wheat and will have to import, probably from Canada, to satisfy its domestic requirements," said a hedge fund manager. "This will have a major impact on the rest of the world if consuming countries can't buy US wheat and Europe becomes the global supplier."
Global stocks of wheat are expected to fall to a 30-year low as consuming countries have scrambled to ensure they have enough supplies for domestic consumption.
"With global inventories at very tight levels, we expect to see further upward pressure across grains prices," said Sudakshina Unnikrishnan of Barclays Capital. "The question for the market is how these high prices will influence US farmers' decisions to allocate land to crops this year."
Record wheat and soyabean prices mean these crops are expected to win land at the expense of corn cultivation in 2008. The USDA will update the market on farmers' planting intentions in March.
Analysts say India and China should allow domestic wheat prices to rise to attract land away from cotton. India says it expects to produce 74.81m tonnes of wheat in 2008, down from 75.81m tonnes last year.
India, the world's second-largest wheat consumer, has imported wheat for the past two years but it says it might not need to import this year if favourable weather boosted production.
But Mark Samson of US Wheat Associates, the wheat marketing group, said India might have to buy 3m tonnes of wheat in the year starting in April, a 68 per cent rise on the previous year.
As a result of the price pressure, the Minneapolis Grain Exchange will remove the daily price limit on the spot-month hard red spring wheat contract for trading on February 25, the first time it has done so.