Bloomberg News

Wheat Shredded as Near-Record Crop Boosts Reserves: Commodities

December 08, 2011

(For more commodity columns, click CMMKT.)

Dec. 8 (Bloomberg) -- The biggest slump in wheat prices in three years may have further to go as expanding harvests from Russia to Canada bolster inventories to the most in a decade.

The U.S. Department of Agriculture will predict tomorrow a 3.4 percent gain in stockpiles to 202.89 million metric tons by June, according to the average of 16 analyst estimates compiled by Bloomberg. Prices that fell 35 percent from a 29-month high of $9.1675 a bushel in February will drop 11 percent more to $5.30 in the next 12 months, Credit Suisse Group AG forecasts.

Global food costs tracked by the United Nations have declined 9.6 percent from a record in February, helping to contain inflation as economic growth slows. Corn and soybeans are also tumbling after farmers responded to record-high prices by planting more crops. Combined output of wheat, corn and soy will jump 3.4 percent to a record 1.8 billion tons this season, 32 percent more than a decade ago, the USDA said last month.

“Every country that can plant more corn and wheat has done so,” said Alex Bos, the manager of agricultural commodities at Macquarie Group Ltd. in New York. “It’s an incredible shift, and there’s still spare farmland capacity that can be put into production.”

Wheat has fallen 25 percent to $5.97 on the Chicago Board of Trade this year, heading for the biggest annual drop since 2008. It is the fifth-worst performer in the Standard & Poor’s GSCI gauge of 24 commodities behind cotton, cocoa, sugar and nickel. The index has risen 2.2 percent as the MSCI All-Country World Index of equities declined 9.6 percent. Treasuries have returned 9.1 percent, a Bank of America Corp. index shows.

Money Managers

Hedge funds and other money managers have held a net-short position, or bets on lower prices, in wheat since September, with a record bearish holding of 50,582 contracts on Nov. 22, data from the Commodity Futures Trading Commission show. The most widely held option gives holders the right to sell wheat at $6 by the end of February, according to CBOT data.

Global wheat production will advance 5.3 percent to 683.3 million tons in the 12 months ending May 31, according to the USDA, which releases its new estimates at 8:30 a.m. in Washington tomorrow. Rabobank said production will rise to 685 million tons, topping the record of 684.3 million in 2010. Demand will expand 3.3 percent to 673.3 million tons. The USDA will probably increase its inventory estimate by 290,000 tons, the Bloomberg survey showed.

The department also will raise its estimate of the global soybean inventory by 0.9 percent to 64.15 million tons and its corn stockpiles prediction by 0.5 percent to 122.13 million tons, the survey showed.

Eight Commodities

Soybeans have fallen 19 percent to $11.325 a bushel this year on the CBOT as corn retreated 4.6 percent to $6.0025 a bushel.

The S&P GSCI Agriculture Index of eight commodities has dropped 19 percent. Corn may decline 10 percent to $5.40 in the next 12 months, Credit Suisse analysts led by Tobias Merath wrote in a Dec. 6 report.

Investors may be skeptical about the USDA’s figures. It reduced the corn-crop estimates in 2010 and 2011 by the most for any two-year period since 1984, data compiled by Bloomberg show. The estimates changed as rain delayed planting and hot, dry weather disrupted the growing season in the U.S. Midwest. The USDA cut its forecast four times in as many months this year, leading critics such as Darrel Good, an agricultural economist at the University of Illinois, to question their reliability.

Record High

In June, at the start of the hottest Midwest summer in 50 years, corn futures for July delivery touched a record $7.9975 in Chicago. The grain then tumbled 17 percent that month as the government said U.S. farmers planted more than analysts were expecting and June 1 stockpiles were 12 percent larger than anticipated.

Even after this year’s declines, grain prices remain costly historically. Wheat has averaged $7.30 this year, about 58 percent more than the 10-year average. Corn averaged $6.83, the most in records going back to 1958. While the UN’s food index has declined for five consecutive months, the gauge is still 48 percent above its average over the past decade.

Speculators are anticipating further declines. They turned bearish on soybean prices at the end of November for the first time since June 2010, CFTC data show. Money managers pared their net-long position in corn to 141,017 futures and options in the week ended Nov. 29, from as many as 408,854 contracts in January, the data show.

Supply Surge

Surging global grain output is compensating for a decline in the U.S., the world’s biggest agricultural exporter. Farmers will reap a smaller wheat crop for a third consecutive year in 2012, and less corn for a second year, the USDA estimates. The nation’s wheat exports are down 22 percent from a year earlier at 18.1 million tons, a sign that this year’s record farm income of $100.9 billion predicted by the USDA may not be repeated next year.

“In the past, basically the U.S. has totally dominated the world export market, but we’re starting to see increased competition,” said Shawn McCambridge, a senior grain analyst for Jefferies Bache Commodities LLC in Chicago.

Nations that were absent from the export market for almost a year have now returned, ensuring global grain supply keeps expanding even as U.S. shipments contract. Russia lifted an almost yearlong export ban in July as its crop recovered from the drought that had decimated it a year earlier. Exports may double in the next 15 years, Russian Deputy Agriculture Minister Alexander Solovyev said Dec. 7.

Ukraine, Canada

Ukraine also eased export quotas and its cargoes will almost double in the year to June, the USDA predicts. Kazakhstan will ship 8.5 million tons of wheat this season, almost 3 million tons more, the department forecasts. Canadian sales will advance 9.1 percent to 18 million tons.

India, the world’s second-biggest wheat consumer, will be a net exporter this year for the first time since 2009, according to the USDA. On Dec. 6, Australia boosted its crop estimate to a record 28.3 million tons, while Canada said its harvest was 9 percent larger than last year.

“High prices have brought on a dramatic increase in global grain production,” said David Smoldt, the West Des Moines, Iowa-based vice president of operations at INTL FCStone Inc., a trader and adviser to commodity producers and consumers. “Prices will extend the drop.”

--With assistance from Eliana Raszewski and Laura Price in Buenos Aires. Editors: Steve Stroth, Patrick McKiernan

To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Whitney McFerron in Chicago at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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