France Poised To Beat U.S. In Wheat Exports After Drought

By Rudy Ruitenberg and Whitney McFerron - Jul 3, 2012
Bloomberg
U.S. farmers, the biggest wheat shippers, are poised to lose their advantage over French growers in export markets after the worst Midwest drought in more than a decade wilted grain crops and drove prices to a 10-month high.

Wheat traded in Chicago jumped 18 percent in the past two weeks as Paris grain rose 12 percent. French supply for delivery after the harvest traded at a premium of $5.38 a metric ton to the U.S. in Paris yesterday, from a record $25.27 on May 2. That may flip to a $5 discount in the next several weeks, said Alexandre Marie, a Bourges, France-based analyst at Offre & Demande Agricole, which advises 5,000 farmers on crop sales.

Just four months ago, European crops were damaged by winter freezes and France, the world’s second-biggest exporter, shipped about 32 percent less grain outside the 27-nation European Union in the first 11 months of the crop year that ended last week. French output forecasts are now rising after ample rain as the U.S. government cut its ratings for domestic grain crops.

“U.S. wheat is going to be priced out of export bids,” said Nick Higgins, a commodities analyst at Rabobank International in London. “The EU is going to have to pick up more of the export burden.”

September futures rose 19 percent to $7.78 a bushel this year on the Chicago Board of Trade, the highest since September, as dry weather also damaged developing corn crops, threatening to cut U.S. feed grain supplies. Prices gained 19 percent to 232 euros ($292.11) a metric ton on the NYSE Liffe exchange in Paris. Both reflect the most active contracts. The premium is based on the November Paris contract and December Chicago wheat.

Crop Office

The Standard & Poor’s GSCI Agriculture Index of eight commodities advanced 3.9 percent since the start of January, led by soybeans and wheat. The wider GSCI gauge of 24 raw materials tumbled into a bear market last month, dropping more than 20 percent from its closing high in February, on mounting concern that slower growth will curb demand. The MSCI All-Country World Index of equities gained 4.8 percent and Treasuries returned 2.1 percent, a Bank of America Corp. index shows.

About 72 percent of the France’s wheat crop was rated in good or excellent condition last month, up from 62 percent in April and 29 percent a year earlier, according to FranceAgriMer, the national crop office. Rainfall in the country’s main growing regions has been in line with the long-term average since March, U.S. Department of Agriculture satellite data show.

Harvest Forecasts

France will reap 35.2 million tons of wheat this season, 1.1 million tons more than estimated in March, Coceral, which lobbies on behalf of producers in the EU, said June 29. Copa- Cogeca, a farm group based in Brussels, increased its forecast by 2.2 million tons to 34.5 million tons the same day. The harvest typically starts in July.

In the U.S., 54 percent of the winter-wheat crop was judged to be in good or excellent condition by June 24, down from 64 percent at the end of April, the USDA estimates. Two thirds of the U.S. suffered from “abnormally dry” weather or worse as of June 26, according to the National Drought Mitigation Center in Lincoln, Nebraska. About 92 percent of Ohio, the biggest grower of soft, red winter wheat traded in Chicago, and all of Kansas, Oklahoma, Indiana and Illinois were drier than normal.

USDA Estimates

Farmers in the U.S. will reap 60.8 million tons this year, the USDA said June 12, reducing its estimate by 310,000 tons. That would still be almost 6.4 million tons more than in the previous season, when drought also parched fields, causing a combined $7.6 billion in agriculture losses in Texas alone. The winter-wheat harvest started last month and the spring variety is normally ready from August.

Rain in a seven-state region of the Midwest was 2 inches (5.1 centimeters) below normal in June, the driest for the month since 1988 and the second driest since 1936, said Mike Tannura, the owner of T-storm Weather LLC. Temperatures in Dodge City, Kansas, reached 111 degrees Fahrenheit (44 degrees Celsius) last week, the hottest since 1874, he said from Chicago.

While the U.S. may harvest less than previously expected, the USDA is still projecting a 9 percent increase in exports to 31.3 million tons. Even after the decline since April, crop conditions now are better than in nine of the past 10 years. The department is scheduled to issue new production and export forecasts on July 11.

Food Prices

Prices in Chicago would have to advance another 73 percent to match the record $13.495 reached in February 2008, the middle of a three-year period when the U.S. State Department estimates more than 60 food riots erupted worldwide. World food prices tracked by the United Nations’ Rome-based Food & Agriculture Organization fell 14 percent from a record in February 2011.

Global wheat output will drop 3.2 percent to 672.1 million tons this year, with lower production from Argentina to Kazakhstan to Australia, the USDA estimates. Stockpiles at the end of the season will be 5 percent lower at 185.8 million tons, still 45 percent higher than the 26-year low reached in 2008, USDA data show.

Consumption may exceed forecasts and drive stockpiles lower should farmers feed more wheat to livestock as corn costs surge. The U.S. crop by June 24 was in its worst condition for that date since 1988 and futures rose 25 percent in the past two weeks. The use of wheat in feed jumped 21 percent to a record 143.1 million tons last year as corn averaged a record $6.78, according to the London-based International Grains Council.

Black Sea

Demand for French wheat may also strengthen as competing supply from the Black Sea region declines. Russia will probably ship 24 percent less this year as Kazakh sales drop 15 percent less and those from Ukraine retreat 20 percent, the USDA estimates. The 27-nation EU will send 14.5 million tons abroad, a decline of 10 percent from the previous season, the department predicts. Australia was the third-largest wheat exporter last year, according to International Trade Centre data.

The EU granted export licenses for 21,194 tons of soft wheat in the week through June 26, the smallest amount since at least 2008. French soft-wheat loaded for destinations outside the EU stood at 8.2 million tons at the end of May, from 12.1 million tons a year earlier, FranceAgriMer estimates.

French shipments dropped after frost in February damaged wheat, barley and rapeseed plants. Crops were lost in the north of the country and in Germany as temperatures dropped to -20 degrees Celsius (-4 degrees Fahrenheit) that month. Wheat covers about 9 percent of mainland France and generated a record $6.75 billion in export income in 2011, Geneva, Switzerland-based ITC data show. That compares with $11.1 billion for the U.S. and $1.97 billion for Germany, the EU’s second-largest exporter.

Months of Rain

Three months of rain have helped the surviving crops flourish and should give Western Europe more wheat to ship abroad than in the previous season, said Pierre Raye, a Paris- based analyst at InVivo, the largest exporter of French wheat. He forecast the country’s soft-wheat crop will climb to 35 million tons from last year’s 33.9 million tons.

Algeria bought 600,000 tons last month, most of it French, according to Offre & Demande Agricole’s Marie. The anticipated rebound in exports will probably take Paris wheat to a $10 premium to Chicago by the end of October, he said.

“This could be a very good opportunity for European wheat, particularly on North African destinations,” said Raye of InVivo. “The world market needs this wheat.”