Wheat under pressure as record world crop looms

By Nigel Hunt - Analysis

LONDON (Reuters) - The prospect of a record world wheat crop is likely to keep prices that have already fallen sharply from all-time highs under pressure, putting a temporary brake on a key driver of global food inflation.

"I really think we are going to see a bumper crop in wheat this year and I think that is going to be the underperformer of the grains," said fund manager Matthew Sena of U.S.-based Castlestone Management.

Global wheat stocks remain low however and any recurrence of the unfavorable weather which devastated crops in several key regions last year could see prices shooting back up again.

"World wheat crops appear to be in good condition at this stage of the season, particularly in the EU-27, Black Sea and soft red winter wheat areas of the U.S.," Rabobank analyst Luke Chandler said in a report this week.

"April/May is a key weather period for wheat production and with the current extreme tightness in the world wheat balance sheet, this season's weather will prove even more crucial than most," Chandler said.

Benchmark May soft red winter wheat futures on the Chicago Board of Trade WK8 fell to a low of $8.01 a bushel in early trade on Friday, its lowest level since November.

The contract has now fallen more than 40 percent from a record peak of $13.49-1/2 set in late February.

Soaring wheat prices have sparked increases in the price of staples such as bread, helping spark riots in several developing countries whose populations were already struggling to cope with living cost increases linked to record high energy markets.

High prices have also, however, sparked a response from farmers with an increase in plantings.

The International Grains Council has projected a world wheat crop of 645 million tonnes in 2008/09, down a marginal 1 million from its previous forecast but still well above a year earlier.

"This would still be a record, exceeding last year's total by 41 million tonnes following a 3.6 percent rise in sowings," the IGC said in a monthly market report this week.

Others have produced similar estimates with the French arable crop office ONIGC earlier this month projecting production would reach 635 to 640 million tonnes and Rabobank's Chandler forecasting 635 million.

THREAT DIMINSHES

"What has been weighing on the market is the fact that every day we get closer to setting that number is stone," said Shawn McCambridge, grains analyst with Prudential Financial, referring to 2008/09 production estimates.

"The threats of significant damage get reduced."