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U.S. wheat a good buy in uncertain world marketBy just about any measure, it is an excellent time to purchase U.S. wheat. Prices have not been this low since mid-2007. Freight rates are at least 60 percent lower than their peaks just four months ago. Producers across the U.S. have harvested an abundant wheat crop with generally excellent quality and milling characteristics. In addition, as always, buyers can reliably fill their orders from U.S. ports. According to the U.S. Department of Agriculture/Economic Research Service "Wheat Outlook" report on Oct. 15, U.S. producers harvested just less than 68.1 MMT (2.5 billion bushels) of wheat from 22.54 million hectares (55.7 million acres) this year. The estimated all wheat yield was a record 3.01 MMT per hectare (44.9 bushels per acre). On top of excellent yields, quality remained strong--up to what millers and wheat food processors have come to expect from U.S. wheat. High quality, low moisture, U.S. milling wheat, shipping at much lower rates, adds value for any buyer. The dramatic drop in U.S. wheat prices from their unusual February and March spikes largely show the market responding to what is likely to be the world's largest wheat crop ever at just over 680 million metric tons. The on-going credit crisis is fueling an exodus of "Index" funds from long positions in all commodities. Falling demand for crude oil is also pulling down wheat prices, but fuel and fertilizer prices have not responded quickly enough for U.S. producers who have planted winter wheat. "The U.S. Department of Agriculture now estimates that, on average, it will cost U.S. producers almost $297 to produce one metric ton of wheat," says USW President Alan Tracy. "That means you can buy U.S. wheat today for less than it costs to produce it. That is not a good situation for our producers, nor is it sustainable--but it is a bargain." It is important for buyers to recognize that, even with the large crop, global wheat supplies remain compromised. USDA currently estimates that the global ending stocks-to-use ratio for 2008-09 will still be lower than all years but one since 1991/92. Confidence in this year's southern hemisphere crop has not strengthened of late (see "Market Watches Southern Hemisphere Harvest" below). One U.S. analyst put it another way recently: the wheat market is just one bad weather situation away from being right back where it was in 2007-08. That means higher prices; and that makes the current situation a buying opportunity. As harvest nears in the Southern Hemisphere, all eyes are on key export origins-- Australia and Argentina. Wheat production in Australia is projected up 65 percent from last year, but uneven weather conditions have lowered expectations. USDA's October World Agricultural Supply and Demand Estimates pegged production at 21.5 MMT, down 500,000 MT from September, and off 14 percent from August estimates. Unusually dry August conditions reduced potential yields in the two largest wheat-producing states of New South Wales and Western Australia. September rainfall, which is critical for determining wheat yield, was in short supply in South Australia and parts of eastern Australia leaving both areas at risk of substantial yield loss. Damage from a severe September frost in Western Australia's wheat belt is expected to reduce harvested area and production, a loss reaching AU$200 million or seven percent of the expected crop value according to the "Seasonal Report" from the WA Department of Agriculture and Food. In Argentina, wheat producers seeded the smallest area in 12 years in the face of dry weather and uncertainty about their government's export policy. USDA reports that a dry winter hindered planting and put one-third of the crop at risk during early emergence and growth stages. Argentina's Agriculture Secretariat recently projected production between 9.5 and 11 MMT. That is well below USDA's 12 MMT estimate, which would be the lowest since 1994-95 and 19 percent below the five-year average. 11/3/08 Date: 10/28/08
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