Wheat Seen Extending Decline as Inventory Rises to Record

By Maria Kolesnikova and Whitney McFerron - Apr 12, 2012
Bloomberg
Wheat prices are falling for a second year as a glut of supply expands global stockpiles to an all-time high and farmers prepare to reap the third-biggest harvest on record.

Inventories will gain 7.1 percent to 210 million metric tons this year and output in the next year of 681 million tons will have been exceeded only twice in history, the London-based International Grains Council predicts. Prices will average $6.38 a bushel in the fourth quarter, about 5.2 percent below the December futures contract traded in Chicago, the median of 10 analyst estimates compiled by Bloomberg shows.

The crop erased this year’s gains on April 4 on easing concern that drought in the U.S. and Europe will ruin crops. Prices have tumbled from as much as $13.495 four years ago as farmers responded by growing more grain. The decline is helping contain global food costs, which remain within about 9 percent of the all-time high reached 14 months ago, according to a gauge of 55 commodities compiled by the United Nations.

“Wheat is fundamentally oversupplied,” said Nick Higgins, a London-based analyst at Rabobank International who expects a fourth-quarter average of $5.95, which would be the lowest for the period since 2009. “The concerns over damage to the European crop are overdone, when you compare them to the supply glut in the rest of the world.”

Agriculture Index

The commodity retreated 2.9 percent to $6.335 on the Chicago Board of Trade since the end of December and averaged $6.44 in the first quarter, 19 percent less than a year earlier. That compares with a 0.4 percent drop this year in the eight- member Standard & Poor’s GSCI (SPGSAG) Agriculture Index and a 7.6 percent gain in the MSCI All-Country World Index. Treasuries lost 0.1 percent, a Bank of America Corp. index shows.

The U.S. Department of Agriculture estimated yesterday that world inventories may total 206.27 million tons, 1.6 percent below last month’s estimate while still the highest in 11 years. The agency hasn’t released projections for the 2012-2013 global crop.

Hedge funds and other speculators have been betting on lower wheat prices since mid-September, Commodity Futures Trading Commission data show. They got more bearish in the week ended April 3, increasing their net-short position by 2 percent to 32,017 futures and options contracts, the data show.

Corn Forecast

While the IGC is forecasting a 2.2 percent drop in global wheat output in the 12 months ending in June 2013, it’s also anticipating a 1.9 percent gain in total grain supply to a record 1.876 billion tons, as corn output climbs. The group, which counts more than 50 nations among its membership, expects wheat stockpiles to contract 1 percent to 208 million tons by the end of that season, still the second-highest on record. Global consumption may rise 0.3 percent to 681 million tons.

Growing conditions in Europe, which accounts for about 20 percent of global output, still pose a threat to expectations for lower prices. Europe will harvest 2.5 percent less winter wheat because of damage from freezing weather, according to Offre & Demande Agricole, a Bourges, France-based farm adviser. Ukraine’s harvest may drop as low as 10 million tons in the next marketing year, from 22 million tons a year earlier, Deputy Agriculture Minister Mykola Bezuhlyi said March 28.

Animal Feed

The slump in prices means wheat is now trading at a 0.4 percent discount to corn, compared with an average premium of 41 percent over the past five years, encouraging substitution in animal feed. Farmers globally will use 131.8 million tons of wheat for feeding livestock in the 12 months ending in June, 14 percent more than a year earlier, the IGC estimates.

Wheat futures on NYSE Euronext in Paris, a European benchmark, are trading 12 percent more than Chicago, compared with an average of 4.6 percent over the past five years, data compiled by Bloomberg show. That may spur more demand for supply from the U.S., the biggest exporting nation, eroding domestic inventories and driving prices higher.

“We’re still bullish on wheat,” said Michael Haigh, the New York-based global head of commodities research at Societe Generale SA, which expects a fourth-quarter average of $7.80. “The three main themes are the substitution effect, weather problems in Europe that are still not resolved, and the fact that U.S. wheat prices are still very competitive.”

Wheat Surplus

The U.S. wheat surplus on May 31 will probably be 793 million bushels (21.6 million tons), down from 862 million bushels a year earlier and an estimate of 825 million last month, the USDA said yesterday. That may be met with increasing supply, with farmers planting the most acres since 2009, the USDA said March 30. U.S. wheat output may rise 8.3 percent to 2.165 billion bushels, the USDA said Feb. 24.

Wheat is the fourth-biggest U.S. crop by value after corn, soybeans and hay. A more than doubling in the S&P GSCI Agriculture Index in the past six years helped generate record farm income of $98.1 billion in 2011 and pushed the value of farmland to an all-time high of $2,350 an acre, USDA data show.

Declining European output may also be offset by supply from Russia. Its grain harvest may total about 94 million tons, near last year’s output and 54 percent more than in 2010 when drought decimated crops, President-elect Vladimir Putin said March 28. Wheat made up 60 percent of the grain crop last year.

Farmer Plans

Demand (US46COWR) for wheat in livestock feed may also weaken as farmers produce a record corn crop. Global corn output will advance 4.2 percent to 900 million tons in the 12 months ending in June 2013, the IGC estimates. U.S. farmers may plant 95.86 million acres of corn this season, the most since 1937, the USDA said March 30.

The glut of corn will probably drive most grain prices lower, said Chris Gadd, an analyst at Macquarie Group Ltd. in London, who expects wheat to average $5.60 in the fourth quarter and $5.20 in the following three months. The use of wheat in feed will drop 7.4 percent in 2012-13, Rabobank estimates. Corn for December delivery closed today at $5.4675 a bushel on the CBOT, 14 percent less than supply for May.

“Overall supplies of wheat are looking relatively comfortable,” said Amy Reynolds, a London-based senior economist with the IGC. “There’s still plenty of time for there to be a very good crop.”