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Europe wheat tour

NOTE - Ray Grabanski is writing this week's column from Western Europe, where he
is traveling this week to discover in more detail the wheat and feed grain
situation in Western Europe.

This week's story details wheat harvest progress
in Holland, Germany, and Denmark as seen first hand by Ray and via interviews
with EU-27 farmers and officials.

The market story in wheat in 2007 is centered in Western Europe, where some
small production problems (almost too small to notice to European farmers and
consumers) are magnified tremendously throughout the rest of the wheat
producing/consuming world. This week, I make my first track back to Europe since
1991, as I first hand research the '2007 EU-27 Wheat Problem' and the reasons
for the tremendous impact on the world wheat price in 2007. I note that feed
grains is also getting some attention by USDA here, as feed grain production was
also cut significantly (6.6 mmt to 138.17 mmt, mostly in corn) in the EU-27 in
the August report (although I'm not sure I'd agree with that assessment by the
look of the Dutch and German corn crop, which have received generous rains at
critical times for corn - wheat harvest).

The most striking impression so far in this trip is the complete lackadaisical
attitude of EU citizens and farmers about the wheat price explosion that is
occurring across the world. In fact, most EU wheat producers are not aware of
any impact at all! If you ask producers about their 2007 wheat crop, they say
it's "About the same as always" which actually is true. They also are quick to
point out that harvest is maybe 5 days behind normal, but they expect to be
completed in just a few days. In Holland, virtually no wheat is left to harvest
while Germany has just a few odd fields here and there (maybe 1-2% of
production?) as of early this week.

Also, it's striking that in Germany, instead of any widespread wheat harvest problem, is the
sheer number of corn acres relative to virtually any other crop. Corn acreage
in both Holland and Germany appears to have expanded sharply since my last trip
here (I saw virtually none in earlier trips), with my guess that corn acreage
was larger than wheat acreage in the northern German highly productive areas.
Percentage wise, I would guess that both Holland and Germany are approaching
having more corn acreage than wheat acreage in production - a huge surprise to
my eyes! This looks like a similar change to North Dakota, USA acreage mixes,
where corn/soybeans have in the past 10-15 years increased substantially with
improved adapted varieties, with subsequent cuts in barley/wheat acreage.

As you move north to Denmark, a larger and larger share of wheat harvest
remains, with northern Denmark (with fairly intensive wheat acreage as a
percentage of the total) for the most part less than 50% harvested. As you move
further north into Denmark, the corn acreage percentage goes down (from perhaps
1 to 1 for wheat acres in the south) to about 4 to 1 favoring wheat acreage over
corn in the north. Northern Denmark must be similar to ND, where the further
north you go, the percentage of corn acreage drops (while southeastern ND is
about 90% corn/soybeans and 5% wheat/barley, northeastern ND is about 60%
wheat/barley, 20% soybeans, and virtually very little corn (but growing).
Dannish farmers have combines in the ready position, however, with most waiting
for damp grain to dry to continue the harvest. For the most part, the standing
grain looks slighty stained but otherwise in mostly good condition.

Really, rather than seeing the big picture of the wheat market from the fields
of European farmers, it can actually be more clearly seen in the recent USDA
August report. Last Friday's report further reduced the EU-27 wheat crop by 1.7 mmt
to 124.93 mmt. This is only about a 1% drop in production estimate (and thus
European farmers "about the same as always" assessment), which is a fairly small
percentage change relative to EU-27 total production. (US corn production for
comparison purposes was projected up almost 2% in August, a much larger
percentage change). The EU production change, however, amounted to most of the
world's 1.9 mmt wheat production loss from last month, with the US amounting to
most of the rest of production loss.

Yet while the EU-27 suffered just a small production loss (less than 1%), the
impact on projected major exporter's ending stocks translates into a nearly 10%
reduction in ending stocks (-2.2 mmt to only 20.79 mmt) due to a combination of
a reduction in production and a HIKE in projected use. Yes, I said a HIKE in
projected use, even though wheat prices have RISEN almost $2 or 30% so far in
2007. Where does the increased use come from? EU-27! Not only does EU-27
increase feed use by 0.5 mmt from last month to 57.5 mmt (or about a shocking
45% of total production), but they also cut exports by 0.5 mmt with prices UP
almost 30%.

Now, what other country in the world (or private businessman) would ever sell less when the wheat price rises 30% and buy more! Not only is this a
nonsensical business decision to make for the EU-27, but they also are projected
to import their increased feed use of wheat. And they are increasing feeding of
wheat in a year that so far has seen corn prices drop about 30%, and wheat prices
rise well over 30%! So while in the US, we are cutting feed use of wheat in the
August report by 35 mb to only 180 mb and increasing exports by 25 mb in
response to market factors (higher wheat prices, lower corn prices in 2007), the
EU-27 is doing exactly the opposite at almost 2x the level of changes in the US!
While the US is making logical adjustments to better balance world supply and
demand, the EU-27 is making things much worse!

And thus we have the real 2007 wheat situation and its root causes, the EU-27
market distorting and destabilization policy (prices do not change for use by
farmers/processors, and the government pays for imports). Combine that with the
speculative funds ownership of more than 1 billion bushels of wheat
futures/options positions, and we have a powderkeg of explosive market power
behind wheat with just itty bitty production adjustments. These funds own grain
that real users (food processors, importers, and hungry people) will need in the
coming year. This powderkeg is like a nuclear weapon in the hands of terrorists
- waiting to explode at some point (as it has this week). Wheat prices are
soaring to new highs, and the European destabilizing impact on the market is
like the renowned story of the simple little frog falling into the swamp which
ends up changing the whole world.

This policy simply is amplifying market
impacts, not decreasing them, and therefore a simple 1% drop in production can
cause a 10% drop in major exporter ending stocks, which causes a 20-40% price
change in world wheat prices in just a few short months!

Next week, I hope to visit more extensively in France, Germany, and Switzerland,
with special stops at ports in Norway, Denmark, Germany, and Rotterdam, and the
MATIF futures exchange in Paris and Euronext in Amsterdam. It'll be interesting
to hear world futures traders impressions of the new world of electronic trading
that is taking over volume worldwide in the past year!

US weather is also still interesting, as I note the US corn crop actually
improved last week 1.1 bu/acre via Pro Ag projections, while HRS wheat declined
significantly (0.5 bu/acre). Is it any wonder corn and wheat prices are moving
opposite directions?

Ray Grabanski is President of Progressive Ag, a marketing and risk management
firm for farmers located in Fargo, ND. For questions or comments, or if you are
interested in more information about Progressive Ag services, call 1-800-450-
1404.

NOTE - Ray Grabanski is writing this week's column from Western Europe, where he is traveling this week to discover in more detail the wheat and feed grain situation in Western Europe.

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