Bloomberg News

Wheat Plunging as Stockpiles Climb to 10-Year High: Commodities

November 15, 2011

(For more commodity columns, click CMMKT.)

Nov. 4 (Bloomberg) -- Wheat is heading for the biggest slump in three years as the second-largest harvest on record swells stockpiles, easing shortages that drove global food costs to an all-time high.

Prices that plunged 21 percent to $6.24 a bushel this year in Chicago will probably drop as low as $5.90 before the end of December, according to the median estimate of nine analysts and traders surveyed by Bloomberg. Supply in the 12 months ending June 30 will expand 5 percent to 684 million metric tons, boosting inventories to the highest in a decade, the London- based International Grains Council estimates.

Production is expanding after last year’s 47 percent price rise led farmers to plant more grain, while Russia and Ukraine recovered from drought that ruined crops. Cheaper wheat will reduce strains caused by rising corn and rice prices and add to pressure on United Nations-monitored food costs that have declined 9 percent from a record in February.

“The wheat is looking beautiful, there’s so much of it,” Bruce Ley, 45, said from his farm near the town of Mullewa in Western Australia in a region known as the Wheatbelt. “I’m a bit worried that the global wheat glut may reduce prices but there’s nothing I can do about that. I’ve just got to harvest the stuff and get it to market.”

Commodity Index

Wheat is heading for its biggest annual decline since 2008, when the IGC says harvests reached a record, and is this year’s third-worst performer in the Standard & Poor’s GSCI gauge of 24 commodities, followed by nickel and cotton. The index gained 2.7 percent since Jan. 1, versus a 7.7 percent drop in the MSCI All-Country World Index of equities and an 8.5 percent return on Treasuries, Bank of America Corp. indexes show.

Harvests are rising in Canada, Russia, Kazakhstan and Ukraine, among the worst hit by last year’s weather, according to the IGC, which includes more than 50 nations. While demand will expand 22 million tons, compared with 3 million tons a year earlier, stockpiles will still grow to 202 million tons, the IGC estimates. That’s 53 percent more than in 2007-2008, when prices reached a record $13.495.

Wheat may rebound should livestock and poultry farmers use more in feed as a substitute for higher-priced corn, according to Rabobank International. Corn trades at a premium of about 19 cents a bushel, compared with an average discount of $1.83 in the past five years, data compiled by Bloomberg show. While China’s corn harvest may gain 6.7 percent to a record this year, according to an SGS SA survey for Bloomberg yesterday, higher demand may still boost Chicago futures, Newedge USA LLC said.

Futures Traders

The IGC anticipates a more than 9 percent gain in wheat- feed use to 124.2 million tons, the highest level in about 20 years. Rabobank says demand may reach 129.5 million tons.

Options and futures traders may be betting on a rally. The most widely held option gives holders the right to buy wheat at $8.50 by Nov. 25, a 34 percent increase from the closing price in Chicago yesterday. Wheat for delivery in September 2012 is 14 percent more expensive than for December this year, according to data from the Chicago Board of Trade.

A return of extreme weather may also curb supplies of other grains, boosting demand for wheat. Floods in Thailand, the world’s largest rice exporter, destroyed as much as 7 million tons of unmilled grain, the government estimates. That equals 4.6 million tons of milled rice, 1 million more than the global surplus expected by the U.S. Department of Agriculture.

Biggest Exporters

The La Nina weather pattern, a period of cooling equatorial waters in the Pacific Ocean that can lower rainfall in South America, may limit corn sowing, according to Luke Chandler, an analyst at Rabobank in London. Argentina and Brazil represent 30 percent of all corn exports and typically plant in the final four months of the year.

The projected decline in wheat prices would boost prospects for U.S. farmers, the world’s biggest exporters, making them more competitive with rivals in the Black Sea region. At $5.90 per bushel, a metric ton of U.S. wheat would cost about $217. That compared with Ukrainian supply priced at $240.50 on Oct. 25, according to UkrAgroConsult, a Kiev-based research company. Egypt, the largest wheat importer, bought 60,000 tons of Ukrainian wheat at $247.92 per ton in a tender on Nov. 1.

Russia lifted an almost yearlong ban on grain shipments in July and Ukraine eased export quotas imposed to ensure domestic supply after last year’s droughts. Russian sales will expand more than fourfold and Ukraine’s will almost double, while U.S. exports will slump 24 percent, the most in more than two decades, the USDA forecasts. The department is scheduled to release new predictions Nov. 9.

Government Forecasts

“At those levels, the U.S. wheat will certainly become competitive,” said Simon Clancy, the director of brokering at Advance Trading Australasia Pty Ltd., which specializes in agriculture. “The Black Sea can only ship so much, and I don’t think it can become much cheaper than that. We will again see buying interest for Chicago wheat.”

Better-than-expected U.S. shipments would help sustain income for farmers, which the government forecasts will rise 31 percent to a record $103.6 billion this year. North Dakota, the biggest wheat grower in 2010, has the nation’s lowest jobless rate, at 3.5 percent.

Cheaper wheat may help food companies’ margins. B&G Foods Inc., the maker of Cream of Wheat cereal, lists wheat as one of the areas with the largest cost increases, President and Chief Executive Officer David Wenner said on a conference call Oct. 25. The Parsippany, New Jersey-based company will report net income of $48.4 million this year, compared with $32.4 million in 2010, the mean of three analyst estimates compiled by Bloomberg show. Shares of B&G Foods rose 58 percent since the start of January.

Instant Noodles

PT Indofood Sukses Makmur, Indonesia’s biggest maker of instant noodles and flour, will report profit of 3.30 trillion rupiah ($369 million) in 2011, compared with 2.95 trillion rupiah last year, the mean of 19 estimates shows. Shares of the Jakarta-based company rose 5.6 percent this year.

Expanding global supply should ensure food companies don’t have to contend with surging prices any time soon. The harvest in Australia, set to be the second-biggest shipper, is estimated at a near-record 26.2 million tons by the government. Exports may climb to an all-time high of 20.4 million tons in the year that started Oct. 1, according to the Canberra-based Australian Bureau of Agricultural and Resource Economics and Sciences, a state forecaster that traces its roots to 1945.

World production will climb 6 percent to 691 million tons, boosting stockpiles, the UN’s Food & Agriculture Organization said in a report yesterday.

“There’s a huge supply of wheat, far more than people had anticipated a few months back,” said Abdolreza Abbassian, a senior FAO economist in Rome. “The recovery in production has been very, very good.”

--With assistance from Phoebe Sedgman in Melbourne. Editors: Jake Lloyd-Smith, James Poole

To contact the reporters on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Jason Scott in Perth at jscott14@bloomberg.net.


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