Wheat Price Jump a Supply Shock That Should Unwind

Wheat price spike driven by weather-related supply shock in key exporters

Projected decline in global wheat production is biggest for 15 years

Wheat production should recover quickly in 2011, assuming normal weather

The spillover from wheat to other food prices, in the absence of further large output revisions, should be limited by the temporary nature of the shock, ample wheat inventories, buoyant harvests for other major crops, and relatively stable energy prices. Upside risks include a more widespread supply shock driven by global weather patterns and protectionist government interventions.

Wheat prices spiked almost 85 percent higher in the two months through early August, reawakening concerns about a broad-based surge in food prices. The wheat price spike has been driven by a weather-related supply shock emanating from key exporters in the former Soviet Union.

The catalysts for the wheat price increase were reports of adverse weather conditions in key producers. Specifically, drought conditions and wildfires in Russia and Kazakhstan, together with the cumulative impact of heavy rain in Ukraine, led to significant downward revisions in global production estimates.

For the harvest year ended in June 2010, Russia, Kazakhstan, and Ukraine accounted for about 15 percent of global wheat production. Weather conditions also led to more modest downgrades in the estimates for Canada and the European Union.

Lower global harvest

Over the past two months, the estimated global wheat harvest for 2010–11 has been revised lower by 23 million tonnes or about 3½ percent. This would represent an annual decline in global production of just over 5 percent, with Russia and other former Soviet Union countries accounting for about three-fourths of the total decline.

This projected decline in global production is the largest for 15 years, but within the range of historical experience. Over the last 50 years, the global wheat market has experienced eight declines in global production of at least 5 percent.

International trade in wheat will likely contract this year, in part due to the imposition of export bans by some countries hit hardest by the supply shock. However, some of the shortfall is expected to be compensated by increased exports from the United States, the European Union, and Australia.

Global wheat exports are expected to decline by about 8 million metric tonnes, or 5 percent on an annual basis. Declines of this magnitude have been...