The US government report WASDE predicts that global wheat stocks-to-use ratio will rise by just four days to 86 days of cover in 2004/05 - the second lowest global inventory in 30 years. In 1999/00 cover hit 131 days.
"The projected price range is raised 10 cents on the lower end of the range to $3.20 to $3.50 per bushel because of stronger-than-expected prices during the past month," claims the report.
Prices are down by more than 25 percent from the highs earlier this year.
But investment bank Goldman Sachs warns that despite the rise in production, prices will be exposed to rises because further reductions in 2004/05 output are likely, particularly in Canada and Australia.
"Low prices do not appropriately reflect the extraordinary low levels of global inventories," writes the bank.
Not only this, Goldman Sachs believes the Chinese government is likely to 'take advantage of the sharp decline in prices to rebuild its stocks of wheat, which have fallen sharply.'
The government, claims the bank, is looking to build 50m mt of grain warehouse capacity to maintain a strategic stockpile of grains. Inventories in China are believed to be at a 200 year low.
Wheat, along with corn and soy, are the starting point for a range of food ingredients, from starch to flour, used widely in food applications. But food makers and ingredients firms across the world have been affected by rising prices for basic food commodities. In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year highs.
Projected 2004/05 global wheat production, use, and stocks are up slightly from October, rising an extra 1.1 million tons to a record 617 million tons. Australian and Canadian output were knocked by adverse weather conditions, but increases in European and Russian output helped offset the losses.
Based on the November WASDE data, global stock-to-use ratios for corn for the end of 2004/05 have been increased modestly by just over four days to 59 days of forward cover, largely due to a boost in US and Chinese harvests.
Prices are less likely to be vulnerable to price rises than wheat, say Goldman Sachs, "given the more mixedinventory situation in corn, the greater storability and thus attractiveness of wheat for Chinese restocking, and the absence of significant near-term risks to production."
Slight increases in output from the US and Brazil have pushed up soybean stocks with WASDE predicting global stocks-to-use ratio rising to 108 days of cover, a four-day increase in October.
Prices have risen in recent days on the discovery of Asian soy rust in a scattering of US states: "We believe that soy rust will have little impact on the current crop, which is mostly harvested, but that the risk to future crops is significant," comments the bank.
Added to the impact of potentially lower yields resulting from the disease is the possibility that users of corn will switch to soy in the face of higher costs for corn. But, "it will likely take several years before soy rust visibly constrains soybean availability," adds the bank.