Wheat, Sugar Set to Drop Next Year as Farmers Boost Output, Australia Says

Global farm prices, including wheat, soybeans and sugar, may drop from next year as farmers boost production after prices soared, according to Australia’s government forecaster, potentially cutting record food costs.

A global gauge of wheat prices may tumble 19 percent in the year from July as world harvests expand 4 percent to 675 million metric tons, rising faster than demand, the Australian Bureau of Agricultural & Resource Economics & Sciences said in a report today. Soybeans in Rotterdam may drop 8 percent, it said.

The bureau’s outlook adds to signs that food costs at an all-time high may spur growers in the U.S., Europe, and Asia to increase plantings and improve yields, paving the way for bigger harvests and, in turn, lower prices. Farmers must decide which crops to prioritize on their plots to meet expected demand.

“It’s probably if not one of the strongest, the strongest battle for acres in history,” said Erin FitzPatrick, a commodities analyst at Rabobank International in London. “We’re going into this season with close to record low stock levels in not just one or two of the commodities competing for the acreage, but in most of the commodities.”

A drop in global food costs may help to ease inflationary pressures that have challenged central bankers from India to China to restrain price gains while maintaining economic growth. Cheaper grains and oilseeds would also benefit the world’s poorest, who spend a greater share of their income on food than people in richer nations, potentially reducing social unrest.

‘Supply Response’

“High agricultural prices will generally generate a supply response,” Jammie Penm, chief commodity analyst at the bureau, said in an interview. “It is not an issue that the world cannot produce food grains for consumption, it is an issue of adverse seasonal conditions and then government policies.”

Wheat in Chicago surged to $9.1675 a bushel on Feb. 14, the highest price since 2008, on rising demand and concern drought may cut China’s output. Wheat has gained 62 percent in the past year, corn has jumped 91 percent, and soybeans have rallied 42 percent. Raw sugar traded at 36.08 cents per pound last month, the highest level since 1980.

“High prices in 2010-11 are expected to encourage producers to increase areas planted to wheat,” the Australian bureau’s quarterly report said. The gain in production in grains and oilseeds “is forecast to put downward pressure on world prices” in 2011-2012, the report said.

To be sure, Etsuo Kitahara, executive director of the International Grains Council, said last month that higher grain prices may be “here to stay” because demand is rising and farmers’ ability to expand cultivation is constrained. “Land is limited,” Kitahara said on Feb. 1.

‘Increased Production’

The general expectation is “that higher prices will elicit some increased production, some of the grains that have seen the biggest run up,” David Cohen, head of Asian forecasting at Action Economics, said by phone from Singapore. “I’d expect it would take a while, not till next year.”

The so-called free-on-board Gulf price of U.S. hard-red winter wheat, described as “the world indicator price,” may drop 19 percent to average $250 per ton in 2011-2012, the Australian bureau’s report said. “Increased wheat supplies are forecast to outweigh a rise in demand,” the report said.

Global wheat ending-stockpiles may gain 3 percent in 2011- 2012, the report said. As a percentage of consumption, global reserves may increase to 29 percent, it said.

Rotterdam Soybeans

The price of soybeans on a so-called cost-insurance-freight basis in Rotterdam may drop 8 percent to $474 a ton in 2011-2012 compared with this year, the report said. “Although world production of soybeans, canola and sunflower seeds is forecast to increase, the effect on world oilseed prices is expected to be largely offset by continued growth in demand.”

Sugar prices may average 20.5 cents per pound in 2011-2012 and 15.6 cents the following year, according to a table in the bureau’s report. Output was expected to gain in many countries, including Indonesia, the report said.

Joe Glauber, the U.S. Department of Agriculture’s chief economist, said on Feb. 24 that “higher market prices will encourage greater plantings.” The U.S. is the world’s largest exporter of wheat, corn and soybeans.

Global wheat output may total 653.5 million tons in the year from June 1, a gain of 7 million tons from a year earlier, Canadian Wheat Board market analyst Neil Townsend said yesterday. Demand at 660 million tons signals a “continuation of historically strong wheat prices,” the board said.

The United Nations Food & Agriculture Organization’s World Food Price Index, a 55-item basket, gained to a record in January. Food costs are at “dangerous levels,” pushing millions into extreme poverty, the World Bank has warned.

(Source: http://www.bloomberg.com/news/2011-03-01/grain-output-may-jump-this-year-as-farmers-sow-more-undercutting-prices.html)