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- CRB Fundamentals - 2008 Commodity Articles

Wheat and Flour

Wheat is a cereal grass, but before cultivation it was a wild grass. It has been grown in temperate regions and cultivated for food since prehistoric times. Wheat is believed to have originated in southwestern Asia. Archeological research indicates that wheat was grown as a crop in the Nile Valley about 5,000 BC. Wheat is not native to the U.S. and was first grown here in 1602 near the Massachusetts coast. The common types of wheat grown in the U.S. are spring and winter wheat. Wheat planted in the spring for summer or autumn harvest is mostly red wheat. Wheat planted in the fall or winter for spring harvest is mostly white wheat. Winter wheat accounts for nearly three-fourths of total U.S. production. Wheat is used mainly as a human food and supplies about 20% of the food calories for the world's population. The primary use for wheat is flour, but it is also used for brewing and distilling, and for making oil, gluten, straw for livestock bedding, livestock feed, hay or silage, newsprint, and other products.

Wheat futures and options are traded on the Mercado a Termino de Buenos Aires (MAT), Sydney Futures Exchange (SFE), London International Financial Futures and Options Exchange (LIFFE), Marche a Terme International de France (MATIF), Budapest Commodity Exchange (BCE), the Chicago Board of Trade (CBOT), the Kansas City Board of Trade (KCBT), the Minneapolis Grain Exchange (MGE), the Mid America Commodity Exchange (MidAm) and the Winnipeg Commodity Exchange (WCE). The Chicago Board of Trade's wheat futures contract calls for the delivery of soft red wheat (No. 1 and 2), hard red winter wheat (No. 1 and 2), dark northern spring wheat (No. 1 and 2), No.1 northern spring at 3 cents/bushel premium, or No. 2 northern spring at par.

Prices - Wheat prices on the CBOT nearest futures chart trended lower in the first third of 2007 to post a 1-1/2 year low of $4.12 per bushel in April 2007. Wheat prices then staged a remarkable rally that took prices up to record highs, finally closing 2007 at $8.85 per bushel, up +77% y/y. Wheat prices continued higher into 2008 and in February 2008 posted an all-time high of $13.00 per bushel. Strong demand and sharply lower supplies were the main driving forces for wheat prices in 2007. Drought hurt the wheat crops in Australia, Canada, and Russia and US production was hurt by a spring freeze followed by excessive precipitation. The U.S. wheat crop in 2007-08 climbed +14.1% yr/yr to 2.067 billion bushels, but that wasn't enough to make up for increased global demand, which shrunk global carry-over in 2007-08 by 11.7% to a 30-year low of 110.4 metric tons. With increased global demand for U.S. wheat, U.S carry-over in 2007-08 fell sharply by -47% to a 60-year low of 242 million bushels. As global supplies tightened, China and Russia raised their export taxes sharply to keep their own wheat at home to quell surging domestic prices.

Supply - World wheat production in the 2006-07 (latest data available) marketing year fell 4.4% to 593.108 million metric tons from the record high of 628.585 million metric tons seen in 2004-05. The world's largest wheat producers are the European Union with 20% of world production in 2006-07, China (18%), India (12%), the U.S. (8%), Russia (7%), and Canada (5%). China's wheat production in 2006-07 rose +17.5% yr/yr to 103.5 million metric tons, but still well below its record high of 123.289 million metric tons in 1997-98. Australia's wheat production fell -58.0% yr/yr to 10.500 million metric tons in 2006-07, which was well below its record high of 26.132 million metric tons in 2003-04. The world land area harvested with wheat in 2006-07 fell -2.9% yr/yr to 212.0 million hectares (1 hectare equals 10,000 square meters or 2.471 acres), but remaining above 209.9 million hectares in 2003-04, which was the smallest wheat harvest area since 1970-71. World wheat yield in 2006-07 was unchanged at 2.80 metric tons per hectare, remaining below the record high of 2.90 metric tons per hectare seen in 2004-05.

U.S. wheat production in 2006-07 fell -13.9% yr/yr to 1.812 billion bushels, which was well below the record U.S. wheat crop of 2.785 billion bushels seen in 1981-82. The U.S. winter wheat crop in 2006 fell -13.4% yr/yr to 1.298 billion bushels, which was well below the record winter wheat crop of 2.097 billion bushels seen in 1981. U.S. production of durum wheat in 2006 fell 47.1% yr/yr to 53.475 million bushels. U.S. production of other spring wheat fell -8.7% yr/yr to 460.480 million bushels. The largest U.S. producing states of winter wheat are Kansas with 22% of U.S. production in 2006, Washington with 9%, Montana with 6%, and Oklahoma with 6%. U.S. farmers planted 57.344 million acres of wheat in 2006, which was up +0.2% yr/yr and was the second smallest wheat acreage since 1972. U.S. wheat yield in 2006-07 was 38.7 bushels per acre, which was well below the record yield of 44.2 bushels per acre seen in 2003-04. Ending stocks for U.S. wheat for 2006-07 are projected by the USDA at 472.2 million bushels, down 17.3% yr/yr from 571.2 million bushels in 2005-06.

Demand - World wheat utilization in 2006-07 (latest data available) fell -1.4% yr/yr to 615.2 million metric tons, down from the 2005-06 record high of 623.8. U.S. consumption of wheat in 2006-07 rose +0.4% yr/yr to 1.151 billion bushels, which was well below the record high of 1.381 billion bushels seen in 1998-99. The consumption breakdown shows that 84% of U.S. wheat consumption in 2006-07 went for food, 13% for feed and residuals, and 7% for seed.

Trade - World trade in wheat in 2006-07 (latest data available) fell -1.6% yr/yr to 111.9 million metric tons from the record of 113.7 million metric tons seen in 2005-06. U.S. exports of wheat in 2006-07 fell 13.3% yr/yr to 875,000 million bushels from 1.009 billion bushels in 2005-06 and remained well below the record of 1.771 billion bushels of exports seen in 1981-82. U.S. imports of wheat in 2006-07 rose sharply by +40.8% to 115.8 million bushels and showed a further recovery from the 16-year low of 63.0 million bushels seen in 2003-04.

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