The worst U.S. drought since the 1930s Dust Bowl is damaging wheat crops across the world’s biggest supplier, at a time when hedge funds are the most bearish on prices in seven months.
About 62% of the country is mired in a dry spell that the government says will last at least until March in states growing the most winter wheat. With dormant crops already in the worst condition since records began in 1985 and global inventories headed for a third annual drop, Chicago futures may rise as much as 26% to $9.50 a bushel this year, the median of 32 analyst estimates compiled by Bloomberg shows.
That raises the prospect of prices reversing their 20% drop since a July peak, a retreat that spurred hedge funds to start positioning for more declines in December. The prolonged drought is increasing concern that supplies will tighten because there is also dry weather in Argentina and Australia. Heat waves in the Black Sea last year curbed cargoes until the next harvest and a lack of rain is slowing barge traffic on the Mississippi, which handles about 60% of U.S. grain exports.
“We don’t see any fundamental reason why the wheat market should be going down,” said Tom Neher, a vice president at AgStar Financial Services in Rochester, Minnesota, who helps manage the company’s grain investments valued at about $2.1 billion. “We’re looking at Argentina and the Black Sea area and Australia with smaller-than-normal crops. In the U.S., the crop isn’t ideal going into the winter stretch.”
Wheat advanced 19% to $7.78 in 2012 on the Chicago Board of Trade, having risen as high as $9.4725 in July. It was the biggest gain in the Standard & Poor’s GSCI Spot gauge of 24 commodities, which rose 0.3%. The MSCI All-Country World Index of equities jumped 13 percent, and the dollar fell 0.5 percent against a basket of six trading partners. Treasuries returned 2.3%, a Bank of America Corp. index shows.
About 33% of winter-wheat fields were in good or excellent condition by Nov. 25, from 52% a year earlier, U.S. Department of Agriculture data show. Winter wheat, which goes dormant during the winter and resumes growth in March and April, is the most common variety grown, accounting for about 70% of U.S. production.
Drought is affecting all of Kansas, the biggest winter-wheat grower, with conditions in the western counties that can cause widespread crop losses, according to the U.S. Drought Monitor. Rainfall was as little as 10% of normal in the past 60 days in parts of Kansas, Oklahoma and Texas, National Weather Service data show.