World wheat markets will face extreme volatility in the coming year, one global market analyst told grain traders, shippers and economists at a conference in Geneva, Switzerland, this week.

Dan Basse, president of Chicago analyst AgResource, left delegates at the Global Grain 2007 conference in no doubt that 2008 would be a “challenging” year for all in the worldwide markets for wheat, maize and oilseeds.

“I can’t leave you with too strong an impression that volatility in the grain markets will be acute and you will see markets like you’ve never seen before.”

Traders would have to learn how to “navigate” the forthcoming season in conditions of unprecedented volatility, he said, although the long term bull market on soft commodities looked set to broadly remain for several years more.

“We will see wheat at $9/bushel again, but not in 2008,” he said.

Market Highs

The US had seen its largest maize plantings since 1933, Chicago monthly wheat futures had risen nearly 50% compared to where they were in 1970 and soybean values had rallied hard to near market highs not seen since 1973, Mr Basse said.

“It’s hard to be as dramatically bullish as I was this time last year unless you’re prepared to bet on a major weather problem in some major production area. Instead it will be volatility that highlights this year’s market.”

US analysts were predicting a biggest-ever world crop of 648m tonnes of wheat but no dramatic increase in world stocks. Biofuels industries would have less of an impact than rising demand for grain from people and livestock.

Biofuels struggling

“Most biofuels producers in the US are making only a slim margin or a loss. Plants are running at 30-40% capacity. Corn is still cheap compared to oil but there is a lack of infrastructure to support biofuel production which will take at least 12-24 months to build.”

Following the EU’s decision to scrap set-aside from 2008, Mr Basse predicted the US Department of Agriculture would be forced to alter its Conservation Reserve Program – similar to set aside – to assuage demand for grain and pressure on food prices.

He also envisaged pressure on parts of the world like the European Union to accept genetically modified crop technologies as increased plantings alone would fail to meet future demand for grains.

Chinese economy

Expected production recoveries in key areas of the world like Australia and Canada in 2008 would mean more grain available, although China, which has become a major buyer of wheat and soybeans as it grows wealthier, was desperately trying to rein in inflation by slowing its new demand for wheat.

The sub-prime lending crisis in the US would also have some impact on commodity markets, Mr Basse said. “Grain markets are no longer divorced from other commodities and currency values.”

Major investment firms like Goldman Sachs were expected to “re-balance” their portfolios which would add to volatility on world commodities markets, he said. So-called “Index” funds now held positions worth $150bn in commodities markets, compared with virtually nothing in 2001.

Freight rates bite

Ocean freight rates were at all-time highs, while livestock production worldwide would continue to rise, needing more animal feed. 

“When you add all this up, it can’t be bullish; it can’t be bearish, but it will be volatile.”

But while the future for new crop wheat looked so uncertain, Mr Basse suggested there was a case for old crop values to rise again in the New Year. “There is still a shortage of old crop wheat. Stocks are still tight and demand from India, Pakistan and Egypt could cause a rally in early 2008.”