Bloomberg News

Russia Wheat-Export Surge Fails to Curb Drought-Fueled Rally

September 12, 2011

(Updates with today’s USDA data in second, sixth, eighth and 13th paragraphs; Updates prices in seventh paragraph.)

Sept. 12 (Bloomberg) -- This year’s surge in Russian wheat exports, big enough to feed Japan for more than two years, may fail to stop a rally as supply is curbed by droughts from the U.S. to Australia.

Russian sales will gain more than fourfold to 17.9 million metric tons this year, second only to the U.S., the median of 16 analysts’ forecasts compiled by Bloomberg showed. A fourth straight year of record consumption means global stockpiles will shrink to 28.7 percent of demand, the smallest ratio since 2009, U.S. Department of Agriculture data show. Prices will rise 16 percent to $8.50 a bushel by the end of December, according to 20 analysts surveyed by Bloomberg.

Russia resumed exports in July after an almost yearlong ban prompted by its worst drought in a half century. Dry conditions are hurting crops from Texas to Iowa, just as near-record corn prices spur livestock farmers to use the most wheat for feed in two decades. Grupo Bimbo SAB, the world’s largest bread maker, and CSM NV, the biggest manufacturer of bakery ingredients, increased prices as grain costs rose.

“Wheat is definitely a bullish market,” Romain Lathiere, a fund manager at Diapason Commodities Management in Lausanne, Switzerland, which has about $9 billion invested in raw materials, said by telephone on Sept. 5. “We don’t have good news concerning the crop, and there is no solution that will last until farmers seed the next crop during this winter. And demand, particularly for feed, is increasing.”

Shrinking Stockpiles

Wheat rose 18 percent on the Chicago Board of Trade since Russia resumed exports July 1, as drought spread across the Great Plains in the U.S. and Europe began harvesting crops after the driest spring in three decades. The Standard & Poor’s GSCI Agriculture index of eight commodities rose 11 percent while the MSCI All-Country World Index of equities slumped 17 percent. Treasuries returned 6.3 percent, a Bank of America Corp. index shows.

Global wheat demand will advance 3.4 percent to 676.9 million tons in the 2011-2012 season, according to the USDA, which uses a combination of local marketing years for its estimates. The department increased its forecast in a report today. Stockpiles will total 194.6 million tons, up 0.7 percent from a year earlier after plunging 3.3 percent a year earlier, the department said.

Cheaper Than Corn

While wheat is trading 47 percent above its 10-year average, it would have to gain another 86 percent to match the all-time high of $13.495 a bushel in February 2008. Wheat futures for December delivery fell 5.75 cents, or 0.8 percent, to $7.24 a bushel at 11:21 a.m. on the Chicago Board of Trade, after rising as much as 0.7 percent. Corn is within 9.9 percent of $7.9975, the price on June 10 for the July futures that was the highest ever for the contract.

The two grains are trading close to parity, compared with a five-year average of wheat costing about 1.45 times more than corn. That will spur an 13 percent gain in the use of wheat in livestock feed this year to 130.1 million tons, the most ever, the USDA estimates.

Russia exported 3.98 million tons of wheat in the last marketing year, the USDA estimates. The additional 13.9 million tons anticipated in the Bloomberg survey compares with annual Japanese consumption of about 6.15 million tons.

Analysts aren’t forecasting a return to the record prices of 2008 because of bigger harvests in Kazakhstan, China, India and Egypt. Those four countries will increase output by 6.9 percent to 227.6 million tons, equal to 34 percent of global production, USDA estimates show.

Egypt’s Imports

Egyptian output will mean less need for overseas purchases by the world’s biggest importer. The most-populous Arab nation will buy 10 million tons, the fewest in three years, USDA forecasts show.

Additional exports may come from Ukraine, which curbed shipments last year through a quota system after a drought. The sales will more than double to 9 million tons this marketing year, the USDA estimates. Ukraine still has a 9 percent duty on outbound wheat shipments.

The rebound in supplies from Russia and Ukraine will contribute to a 4.6 percent increase in global production to 678.1 million tons, exceeding demand of 676.86 million, the USDA said today in a report. A month earlier, the department had forecast a production deficit for the second straight year.

Speculator Holdings

The rally also may be curbed by investors betting that a weaker global economy will hurt demand. Consumption fell 0.8 percent in 2008 as the world suffered its worst recession since World War II. More than $8.2 trillion was erased from the value of global equities since April 30, data compiled by Bloomberg show.

Speculators remain bullish on wheat. Hedge funds switched to a net-long position, or bet on higher prices, in the week ended Aug. 23, having been bearish since June, data from the Commodity Futures Trading Commission show. The following week, they more than tripled their combined wager to the highest in almost two months.

The most widely held option in Chicago futures trading gives holders the right to buy wheat at $9 a bushel by November, with the next biggest contracts at $8 and $10 by the same date, Chicago Board of Trade data show.

Price Increases

Costlier grain drove Mexico City-based Grupo Bimbo, which makes Entenmann’s cakes and Thomas’ English muffins, to raise prices by 3 percent to 4 percent in the first half. Flour expenses rose 30 percent in the second quarter, Chief Executive Officer Daniel Servitje said in a conference call July 22. The company will report a 14 percent gain in net income to 6.13 billion pesos ($483 million) this year, the mean of four analyst estimates compiled by Bloomberg shows.

CSM, based in Amsterdam, said in July its price increases weren’t keeping up with raw material costs, which will rise by about 240 million euros ($328 million) for the year. The company will report net income of 84.6 million euros this year, compared with 99.3 million in 2010, the mean of seven analysts’ estimates shows.

The U.S. drought may keep limiting supply into next year. The current harvest will drop 6 percent to 56.5 million tons, a four-year low, the USDA estimates. The next crop may be even smaller unless it rains in the coming two months, said Shawn McCambridge, the senior grain analyst for Jefferies Bache Commodities LLC in Chicago.

Fields Fallow

“They’re in such an exceptional drought now, I have to wonder if farmers are going to be willing to plant into basically dust,” McCambridge said. Farmers may leave fields fallow over the winter and instead plant sorghum or corn in spring, he said.

Parts of southern Kansas and western Oklahoma have had less than half their normal rainfall, while areas of Texas had 25 percent or less, National Weather Service data show. Drought has spread northeastward, hurting corn and soybeans in Iowa, Illinois and Indiana. In southwestern U.S. wheat-growing areas, the drought may last through November, because of the developing La Nina, a period of cooling equatorial waters on the Pacific Ocean, the service estimates.

Kansas, Texas and Oklahoma are historically the biggest growers of hard, red winter wheat used to make bread, and in 2010 they accounted for about 28 percent of U.S. production of all varieties. Winter-wheat crops are planted from September and harvested beginning in May.

Smaller Australia Crop

Australia’s crop, forecast by the USDA to drop about 4 percent to 25 million tons, is also threatened. Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Westpac Banking Corp. and Commonwealth Bank of Australia all cut estimates in the last month, citing dry conditions in eastern states. The harvest starts in October.

Spring drought hurt yields in France and Germany, the EU’s largest growers and shippers, and rain during the German harvest delayed harvesting.

“The high harvest in Russia is unlikely to compensate for losses in the U.S. and European harvests,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by telephone on Sept. 7. “Wheat is a defensive play during economic slowdowns, so prices and demand are likely to be more stable or even rise compared with industrial commodities.”

--With assistance from Steve Stroth in Chicago. Editors: Steve Stroth, Millie Munshi

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net; Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Marina Sysoyeva in Moscow at msysoyeva@bloomberg.net

To contact the editors responsible for this story: Steve Stroth at sstroth@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net


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