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French Wheat Premium Seen Erased by Russia Rebound: Commodities

May 23, 2013

French Wheat Premium Seen Erased by Russia Rebound

Paris wheat fell 9 percent to 206 euros ($264) a ton this year as Chicago futures retreated 13 percent to $7.1175 a bushel. Photographer: Balint Porneczi/Bloomberg

French wheat exporters face tougher competition from the Black Sea this year as crops in Russia and Ukraine recover from drought, erasing the premium paid for Paris-traded futures over the global benchmark in Chicago.

Milling-wheat on NYSE Liffe that cost $17 a metric ton more than Chicago futures last month will swing to a $10 discount by July, said Chris Gadd, an analyst at Macquarie Group Ltd. in London. Wheat output across the former Soviet Union will surge 39 percent and Russian shipments will advance 68 percent, the U.S. Department of Agriculture estimates.

The resurgence in Black Sea wheat output mirrors a global expansion in supply that the USDA anticipates will reach a record this year. The 27-nation European Union’s exports surged 30 percent last season as lower sales from Russia and Ukraine drove consumers to seek grain from France. The bloc’s shipments probably will retreat 21 percent in the 12 months starting July 1 even as production reaches a four-year high, the USDA says.

“With the former Soviet Union back in the market, Europe is not going to have anywhere near the export program it had last year,” Gadd said. “France is going to have to fight to find demand, so prices are going to have to come under pressure to become competitive.”

Milling-wheat futures jumped 27 percent in Paris last year, outpacing the 19 percent gain in Chicago. Liffe’s November contract, representing crops from the next harvest, traded at a premium of $2.52 a ton to December wheat on the Chicago Board of Trade today. Paris grain was last at a discount on Jan. 28.

Chicago Futures

Paris wheat fell 8.3 percent to 206.75 euros ($267) a ton this year as Chicago futures retreated 12 percent to $7.2175 a bushel. The Standard & Poor’s GSCI gauge of 24 commodities dropped 3.6 percent as the MSCI All-Country World Index of equities advanced 9.7 percent. Treasuries lost 0.6 percent, a Bank of America Corp. index shows.

The EU may sell as much as 4 million tons less wheat this season, Gadd said. The harvest usually starts in July across most of Europe, Ukraine and Russia. The USDA expects production in the 12-nation former Soviet Union to gain 39 percent to 107.1 million tons as EU production expands 5.1 percent to 138.8 million tons. Russian exports will advance to 18 million tons, compared with a retreat in EU sales to 17 million tons.

Russian milling wheat for delivery during the harvest is selling for about $270 a ton on the spot market, said Matt Ammermann, a commodity risk manager for INTL FCStone in London. U.S. hard, red winter-wheat for August shipment costs $327 a ton, he said. Combined exports from Russia and Ukraine may reach 22.25 million tons, he said.

Grains Council

France will have shipped 18.5 million tons from the 2012-13 season by the end of the marketing year June 30, according to FranceAgriMer, the national crop office. That would rank it as the world’s fourth-largest exporter, after the U.S., Australia and Canada, according to International Grains Council data. Russia’s exports of 10.6 million tons ranks it fifth.

Heavier-than-average rain and below-normal temperatures in parts of northwest Europe may limit grain output and curb the drop in prices. Crop development in France was about two weeks behind schedule by May 15, according to FranceAgriMer. In the U.K., the EU’s third-biggest wheat grower, about 25 percent of winter wheat crops weren’t planted because fields were too wet, the country’s Agriculture & Horticulture Development Board says.

“We’re not off to a very auspicious start,” said Mark Dordery, the Rotterdam-based head of European grains and oilseeds at Nidera BV, an agricultural product trader. “It’s been a very mixed picture, with some countries, particularly in northwest Europe, having difficult planting conditions in the autumn followed by a very cold and late spring.”

Behind Normal

The EU’s crop-monitoring unit cut its forecast for soft-wheat yields May 21 as rain hurt grains in the U.K. and Ireland. In Germany, the second-biggest wheat grower, plant development is still 10 days behind normal, it said. The agency also cut its yield prediction for Ukraine because of dry weather. While some parts of Russia lack soil moisture, yields are still likely to be “above average,” the crop body said.

Russia will also face less competition from the U.S., the biggest shipper, with the USDA anticipating a drop in output to 55.98 million tons from 61.76 million tons.

Almost all of Kansas, the top winter-wheat growing state, had “abnormally dry” to “exceptional” drought conditions on May 14, according to the U.S. Drought Monitor. Fields in Oklahoma were hurt by freezing weather from March to early May, so that production in the state may be 45 percent smaller than last year, according to the Oklahoma Wheat Commission.

Alternative Feeds

Production is declining as demand increases from livestock producers looking for alternative feeds after a drop in corn inventories. That will help boost Chicago prices, Macquarie’s Gadd said. July wheat futures on CBOT are 37.5 cents a bushel more expensive than the equivalent corn contract, compared with an average premium of about $1.43 since 2010.

Rising Black Sea wheat output also diminishes the risk of countries in the region banning exports. A ban on shipments by Russia in 2010 after drought damaged its crop contributed to a doubling in the price of Chicago futures in two months.

Black Sea nations are unlikely to restrict trade this season because production will more than meet domestic demand, said Leonid Kozachenko, the president of the Ukrainian Agrarian Confederation in Kiev. Only about 2 percent of the country’s winter wheat needed replanting this year, compared with an average of 15 percent in the past decade, he said.

“We’re expecting very good crops for the current year because we had more or less acceptable weather conditions,” Kozachenko said. “Black Sea region countries like Ukraine and Russia will be more competitive this year.”

To contact the reporter on this story: Whitney McFerron in London at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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