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Wheat Bear Market Worsens as U.S. Farms Lose Share

June 4, 2013
p62 Hold on Wheat, Move on Cotton
  

U.S. wheat farmers are enduring torrential spring rain after last year’s drought, reducing their share of worldwide exports to a near-record low at a time when rising global supply is driving prices into a bear market.

Shipments will fall to 17.6 percent of global exports in the 12 months through May 2014, compared with 20.3 percent in 2013 and the all-time low of 17.5 percent in 2010, the U.S. Department of Agriculture estimates. The domestic crop is contracting for the fourth time in five years, and expanding harvests from Canada to Russia are curbing the dominance of U.S. growers, who accounted for half of sales in 1974.

Prices tumbled into a bear market in January and ample supplies will send futures traded in Chicago down an additional 11 percent to $6.25 a bushel in six months, Goldman Sachs Group Inc. predicts. That will threaten farmers’ profit in the U.S., where winter wheat in the southern Great Plains was damaged by the worst drought since the 1930s Dust Bowl before too much rain delayed northern spring-wheat planting. U.S. farm income rose 14 percent to $128.2 billion last year as prices surged and insurers made record payouts for ruined fields.

"It’s not as rosy as it was last year," said Gary Millershaski, who saw drought destroy about 450 of the 2,800 acres of hard, red winter wheat he grows 21 miles west of Garden City, Kansas. "We don’t get to set our prices. We just take what the market delivers. Worrying about prices would eat you up. It’s hard enough worrying about the weather."
 

More Supply

Prices tumbled 26 percent on the Chicago Board of Trade since reaching an almost four-year high of $9.4725 on July 23. This year’s 10 percent drop compares with a 5.1 percent retreat in the Standard & Poor’s GSCI Agriculture Index of eight commodities. The MSCI All-Country World Index of equities gained 8.4 percent, and a Bank of America Corp. index shows Treasuries lost 1.1 percent.

Global wheat production will jump 6.9 percent to a record 701.1 million metric tons in the year that began on June 1, exceeding the 3 percent expansion in demand to 694.1 million tons, the USDA said May 10. A 6.6 percent increase from Canada, the second-largest exporter, and gains of 48 percent in Russia and 40 percent in Ukraine compare with a 9.4 percent drop in the U.S.

Combined exports from all suppliers will rise 4.3 percent to 143.32 million tons, even as U.S. shipments contract for a third year, down 9.8 percent to 25.17 million tons, according to the USDA.

Hedge funds and other large speculators held bearish bets on prices every week this year, U.S. Commodity Futures Trading Commission data show. As of May 28, the net-short position was 36,167 futures and options, 31 percent more than the average since the start of January.
 

Crop Damage

The risk of further crop damage may revive prices. While the drought is over in most of the U.S., winter-wheat fields sown in October remain parched in western Kansas, Oklahoma and Texas, where farmers may begin harvesting by the end of June. Production of winter varieties, which accounted for 72 percent of the crop in the past season, will drop 10 percent this year to 1.486 billion bushels, including a 23 percent plunge in hard, red winter wheat grown in the Plains, USDA data show.

As of May 28 in Kansas, 48 percent of the state was in extreme or exceptional drought, meaning crop losses are inevitable or already occurred, compared with less than 0.1 percent a year earlier, the Lincoln, Nebraska-based U.S. Drought Monitor reported. Oklahoma was at 27 percent, compared with 3.5 percent a year earlier.
 

Rain Delays 

Spring-wheat planting has been delayed by rain, with about 80 percent of the anticipated acreage sown by June 2, compared with 100 percent a year earlier, according to the government. Rainfall in North Dakota, the largest grower, was six times the average in the past month, National Weather Service data show. The harvest is mostly in September. Iowa had its wettest April and May in records going back to 1873, according to Harry Hillaker, the state climatologist.

The International Grains Council in London raised its forecast for global wheat production to 682.1 million tons on May 31, 2.2 million tons above its April estimate. The agency predicted bigger stockpiles and said world trade will shrink as importers and exporters harvest more grain.

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