Record Wheat Forecast Spurs Investor Bets Price Rout Will Deepen

February 15, 2016 09:06 AM
 
wheat

The rain and snow bolstering wheat crops across Kansas are also dousing expectations for a recovery in prices.

Improving plant conditions are underscoring the outlook for ample supplies after the U.S. government on Tuesday raised its estimate for world inventories to an all-time high. Money managers last week expanded their wagers on prices declines by two-thirds.

Falling consumption in China and India is adding to the surplus concerns, and prices are falling around the globe. Paris milling wheat reached a five-year low last week, while benchmark Chicago futures fell to the cheapest since 2010. American farmers, saddled with a stronger dollar, are having an even harder time finding buyers for their relatively expensive supplies. The U.S. Department of Agriculture forecasts that exports from the country will shrink to the smallest since 1972.

“The U.S. continues to be uncompetitive in export markets, and there’s not much going wrong from a production point of view,” said Fiona Boal, a London-based director of commodity research at Fulcrum Asset Management, which oversees $3.7 billion. “The competition is pretty intense,” among sellers, she said.

Bearish Bets

Hedge funds and other large speculators increased their net-short holdings in wheat to 81,045 U.S. futures and options in the week ended Feb. 9, according to Commodity Futures Trading Commission data released three days later. That compares with 48,685 a week earlier. Futures for March delivery fell 2 percent last week to $4.575 a bushel on the Chicago Board of Trade. Prices for the hard, red winter variety, grown in the Great Plains and used to make bread, slumped 2.1 percent to $4.4425 a bushel, and reached the lowest since 2007.

Prices may keep falling amid “fairly mild” weather in the Northern Hemisphere that’s aiding production, said Ashmead Pringle, the president of Greenhaven Group in Atlanta, Georgia, which advises on $300 million of private and public commodities investment. Crop ratings in Kansas improved in January, the latest government data show.

The USDA last week cut its outlook for global consumption as Chinese government policies favor the use of other grains for food and feed, and India had bigger-than-anticipated government stockpiles. At the same time, production is poised to reach a record. The bumper harvest combined with declining demand will expand world stockpiles to 238.9 million metric tons by June, the most ever.

Bigger grain and oilseed supplies have pushed world food costs to the lowest since April 2009 as declines in commodities help keep a lid on inflation. The lower prices are taking a toll on producers. The USDA last week said farmers will face a drop in profit for the third straight year. Falling incomes are shrinking demand for farm supplies. Shares of fertilizer-maker Potash Corp. of Saskatchewan Inc. have dropped more than 50 percent in the past year. Monsanto Co., the biggest global seed company, has tumbled almost 30 percent.

Declining farmer incomes may prompt planting reductions. That could help to keep inventories from continuing to expand, according to analysts at Societe Generale SA. Lower prices could also help attract speculative investors, said Lara Magnusen, a La Jolla, California-based portfolio manager at Altegris Advisors.

“We’re at multi-year lows, and we may start to see some buyers come in slowly,” said Magnusen, who works for the research arm of the Altegris group of affiliated companies that manage $2.44 billion. Still, “we’re seeing that increase in global wheat supply and decline in demand, so unless we start to see some real economic growth from India and China, the demand side of the equation is not going to be very relevant,” she said.

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