U.S. 2011 wheat carryover down 13% from July

U.S. wheat carryover on June 1, 2011, was projected at 952million bus, down 141 million bus, or 13%, from 1,093 million bus forecast in July and down 21 million bus, or 2%, from 973 million bus in 2010, the U.S. Department of Agriculture said in its August 12 World Agricultural Supply and Demand Estimates.

The Food and Agribusiness team at Rabobank, an international financial services provider, say due to the continued rise in wheat prices this could mean bakers cutting down on promotions, passing on increased costs to customers and substituting ingredients (for instance, margarine for butter).

Rabobank’s Sapna Naik, said: “Even as the bakery industry struggles to come to terms with the demand slowdown, the pressure of high commodity costs – wheat in this case – has resurfaced.”

Rabobank say spot CBOT wheat prices are up 59 percent since beginning of July due to rising uncertainty and consumer concerns.

Naik said: “There have been production setbacks in the EU, Canada and most importantly in the Black Sea region and a resultant ban in Russian grain exports.

“With initial expectations of a further build up in global stocks, the consensus view was to be bearish both from speculative perspective and physical perspective.

“However, as production setback were realised, both trade and fund shorts began to cover their positions, while at the same time new speculative long positions were being established.

“The result of these production downgrades has been a combination of panic and fear as well as a huge influx of speculative capital.

“Bread makers are very sensitive to changes in the cost of wheat.

“Wheat costs make up around 29 percent of the variable costs in bread.

“Since bread is a predominantly private label product there is not much flexibility.

“However, for biscuit players, wheat is a slightly lower component of their variable costs. Moreover, due to presence of branded players in biscuits, there is a margin cushion.”

In the short term, Naik says Rabobank see a limited impact due to the fact food processing and bakery players have contracts for a period of six months, so are covered with respect to key commodities.

To conclude, Naik said: “The current rise in wheat prices as compared to the spike in 2007/08 seems to be caused by worries related to wheat exports from Russia.

“Rabobank’s view is that there are enough wheat stocks to make up for the shortage and as such; this price hike is expected to be temporary.

“Bakery players’ margins are not expected to be impacted strongly.

“However, should the wheat price levels remain high for a longer period, then the players will need to consider various options to minimise damage to profits.

“Moreover, the consumer confidence being weak at the moment retailers would be cautious in passing on costs to consumers.”