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Chinese wheat stocks rise but prices still exposed

18-Oct-2004

A rise in global stocks of wheat after a 30-year low will offer continued relief to the tighter prices experienced by the food industry in previous years, but the food chain still needs to stay on the alert.

The wheat inventory coverage for the world improved by some six days to 87 days in the last month, on the back of favourable growing conditions, particularly in Europe, China, the former Soviet Union and the US.

But a report from Goldman Sachs last week warned that current prices are undervalued in relation to the actual current stocks.

 

"The most recent estimates by the United States Department of Agriculture (USDA) did not likely embed late-summer weather-related damage to crops in the US, Canada and Australia - the three largest wheat exporters," writes the investment bank.

 

Wheat, rice, corn and soybeans are all key grains used for sourcing food ingredients found extensively in food formulations. But commodity prices have been high for cereals because the world has lost its grain - corn, wheat, soybean - buffer zone.

 

In each of the last four years total grain production has fallen short of consumption, forcing a global draw-down in stocks. As such, soybeans recently hit 15-year highs and wheat and corn seven-year highs.

 

And rising commodity and ingredients prices continue to hit food manufacturers. In June this year US food giant Kraft said the price squeezes had resulted in increased costs of about $200 million compared to the year before, eating into fourth quarter earnings that dropped to $698 million from $949 million in the 2003 period.

 

Kraft joined fellow US food supplier General Mills that warned in the same month soaring commodity prices would impact the bottom line, despite reporting a 20 per cent rise in net profit to $278 million (€228m) for the fourth quarter.

 

Despite an estimate rise in global stocks wheat prices are still exposed, warns Goldman Sachs. The bank emphasised that even taking into account current expectations for the crop, over the next 12 months stocks will still remain at 30-year lows.

 

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