Farmers from Australia to Europe to the U.S. are poised to reap the second-largest wheat crop on record as fields recover from drought and heat waves, boosting global stockpiles for the first time in four years.
Output will climb 4.3% to 690 million metric tons, about 10 million tons short of the all-time high set two years ago, the United Nations estimates. Global inventories will increase by 2 million tons to 176 million tons, the Australian Bureau of Agricultural and Resource Economics and Sciences predicts. Prices will probably drop 17% to $6 a bushel in Chicago by the end of the year, according to the median of 16 analyst and trader estimates compiled by Bloomberg.
Food supply is expanding, with the UN forecasting a record rice harvest and the U.S. government the biggest-ever corn and soybean crops. Wheat closed at $7.1275 on the Chicago Board of Trade yesterday and last traded at $6 in May, before the worst U.S. drought since the 1930s and heat waves in Europe drove prices to a four-year high in July. Snowstorms in the U.S. have since helped boost soil moisture, Joe Glauber, chief economist at the U.S. Department of Agriculture, said March 6.
“The supply situation was compromised through some very adverse weather events in the Northern Hemisphere,” said Steve Mellington, the chief executive officer of the Australian Grain Growers Cooperative, which has 350 members across three states. “Growers are now responding to those price signals with the increased area being planted this year.”
The supply outlook flipped wheat from being last year’s best performer in the Standard & Poor’s GSCI gauge of 24 raw materials to the fourth worst in 2013. The grain has fallen 7.2% while the S&P GSCI gained 0.4% and the MSCI All- Country World Index of equities rallied 5.5%. Treasuries lost 0.7%, according to data from Bank of America Corp.
Europe will lead the rebound and yields are set to recover in Russia, the third-biggest shipper last season, says the UN’s Food & Agriculture Organization. That would boost inventories, said Bangkok-based Hiroyuki Konuma, assistant director-general. A recovery in reserves would follow three years of declines, FAO data show. The world grain crop, including wheat and corn, will probably rise 7.2% to 2.406 billion tons in the coming season, estimates trader Alfred C. Toepfer International GmbH.
Higher production should make for more exports. India, the third-largest grower after the European Union and China, may boost shipments to a record 10 million tons to clear out state stockpiles, according to the state-backed National Centre for Agricultural Economics and Policy Research. Exports were 6.5 million tons this year, according to USDA data.
The U.S. drought eased after snow from Texas to Wisconsin combined with above-average rainfall east of the Mississippi River, said AccuWeather Inc. The USDA still forecasts a 7.4% drop in the harvest to 57.2 million tons this year.
The Northern Hemisphere’s winter-wheat crops are off to a poor start, Goldman Sachs Group Inc. analysts including New York-based Damien Courvalin said in a report March 11. The bank expects prices to rise to $7.80 in three months. A further drop in global supplies in 2013 would mean inventories declining to critically low levels, the analysts said.
Winter crops in the U.S., which accounted for about 74% of the area planted last year, were in the worst condition since at least 1985 as they went into dormancy in November, USDA data show. Plants should resume growth this month and are harvested from May.
“You’re coming into a very critical window,” said Alan Winney, chairman of Emerald Group Australia Pty, which says it’s the third-largest storage and handling network in eastern Australia. “If you start to get some dry weather or weather concerns you could see the market rebound quite quickly. If we continue with the same generally stable weather around the world, I think we’ll go lower.”
Changing weather can drive sudden changes in prices. Wheat averaged about $6.41 in the first five months of 2012, before surging more than 50% in about seven weeks as drought emerged in the U.S. and Europe. The grain reached $9.4725 in July, the highest in four years. While the $6 projected in the Bloomberg survey is higher than the $5.58 average in the past decade, it is less than half the record $12.825 close in 2008.
The ratio of global stockpiles to demand in 2013-2014 will be 26.9%, according to Rabobank International. While up from 25.8% in 2012-2013, it’s lower than the average of 27.6% in the five years to 2011-2012.
World food costs tracked by the Rome-based FAO dropped for a fifth month in February and the 55-item index is 12% below a record reached in February 2011. Glauber of the USDA said last month that crop prices including soybeans and corn should ease in 2013 as farmers expand supply. Both reached records last year.
Hedge funds and other large speculators have been betting on lower prices since December. They were net-short 41,519 futures and options in the week to March 12, from a net-long 80,827 contracts in August, U.S. Commodity Futures Trading Commission data show.
Russia will produce 53 million tons of wheat this season, 39% more than last year, as output in Ukraine jumps 23% to 19.5 million tons and Kazakhstan’s crop surges 48% to 15.2 million tons, the FAO estimates. Toepfer, the trader part-owned by Archer-Daniels-Midland Co., expects the global crop to gain 4.3% to 682 million tons.
In Australia, last season’s second-largest exporter, production may rise 13% in the year from July 1, the government forecaster said. Shipments probably will advance 13% to 18 million tons in 2013-2014, according to CBH Group, the country’s biggest grain handler. Canada’s Farm Ministry is forecasting a 4.8% gain in output to 28.5 million tons. The country was the fourth-largest shipper.
“We are expecting a rebound in wheat production in 2013, mainly on expectations of a return to average yields,” said Konuma. “We would expect a more comfortable supply and demand situation at the global level.”