Chicago: Farmers are sowing the seeds for an end to the biggest rally in wheat since the former Soviet Union cornered the US market in the 1970s.
Growers from Kansas to India are preparing the world’s largest wheat crop in 10 years, overwhelming demand and refilling barren grain bins. The cereal has risen 78% this year—the most of any farm commodity.
High yield: Growers from Kansas to Indian are prepsring the world’s largest wheat crop in 10 years, overwhelming demand and refilling barren grain bins
Prices will fall 30% to $6 (Rs240) a bushel within a year, said James Gutman at Goldman Sachs Group Inc. in London, and Pierre Martin, manager of a $490 million commodity fund at Frankfurt-based DWS Investment GmbH. Chicago futures markets show a similar drop. Hedge funds have curbed their bets on the rally, trimming net long positions in futures and options contracts by 44% the past five weeks, government data show.
“Would I buy wheat today? No,” said Jim Rogers, the chairman of Beeland Interests Inc., who predicted the start of a rise in commodity prices in 1999. “Wheat has been going straight up for about a year. I don’t like to jump on a moving bus.” Wheat has never been more expensive relative to corn, soybeans and cotton. Rising prices spurred Italian consumers to boycott pasta and bread this month, while South Korean livestock producers reduced imports. “As farmers expand production, inventories will likely recover, and thus prices would fall sharply,” said Gutman, whose team anticipated the rally in commodities this year. He recommends buying corn because of the demand for biofuels.
Wheat for December delivery—the most active contract, rose 2.1% to around $8.93 a bushel on Monday. The crop reached a record $9.11 this month on the Chicago Board of Trade after weather damaged crops from Canada to Australia and inventories headed to their lowest in 26 years. Record wheat and milk prices fuelled a 2.4% increase in US inflation this year.
The price of the grain last climbed steeply in 1973 after crop failures forced the former Soviet Union to quadruple wheat imports to 15.6 million tonnes (mt), including about 30% of US exports that year.
Farmers will harvest at least 3.3% more acres next year than they did this year, said William Tierney, executive vice-president of Albuquerque, New Mexico-based consulting company John Stewart & Associates Inc. in Washington, DC. Wheat prices will likely fall 50% by July, he added.
“Unless you are going to predict a third consecutive year of crop problems, prices for July Chicago wheat futures may fall below $4,” from $6.29 on 21 September, Tierney said. Wheat production worldwide will rise 4.1% to a record 641mt, he said. A 60-pound bushel holds enough to make 73 loaves of bread.
Better to buy corn
Martin of DWS Investment, a unit of Deutsche Bank AG, is reducing his wheat holdings in favour of corn and soybeans, he said, declining to be more specific. Malinda Goldsmith, a partner at Four Seasons Commodities Corp. in Dallas, is selling wheat and buying corn, anticipating a decline in wheat’s record premium.
So-called net long positions in Chicago totalled 21,197 futures and options contracts on 18 September—down from 37,768 on 14 August, US Commodity Futures Trading Commission data show.
“Prices will drop,” said Park Yang Jin, business manager at Seoul-based Daehan Flour Mills Co., South Korea’s largest milling wheat importer. “Record prices will drive farmers to plant more.”
The surge in grain prices means aid to developing nations from the US, the European Union (EU) and Australia may drop to 5.5mt this year—the lowest since the 1960s, said Abdolreza Abbassian, an analyst at the Rome-based United Nations Food and Agriculture Organization. The Food and Agriculture Organization (FAO) of the United Nations has recorded riots over food in Niger, Guinea, Burkina Faso and Yemen, he said.
The EU on 13 September unveiled plans for a one-year moratorium on rules that require farmers to leave 10% of their land fallow. US farmers, the biggest wheat exporters, have until 1 October to lock in government-funded crop insurance, which guarantees a record pre-planting price of almost $6 a bushel at harvest— 50% higher than the average of the past two seasons.
Growers in the northern hemisphere are seeding crops that may result in the largest harvest acreage in any year since 1997, Tierney said.
“We’ll probably see an increase in the European Union, the US, potentially also in Canada, and although it’s early to say, Australia and Argentina,” said Amy Reynolds, a senior economist at the London-based International Grains Council, an intergovernmental organization focused on grains trade. Wheat plantings rose 2.9% to 214 million ha this season, she said.
Farmers respond to high prices with more supplies than in any other industry, said Michael Swanson, senior agricultural economist at Wells Fargo & Co. in Minneapolis. In the past two years, high prices for sugar and corn led to larger-than-expected production and price declines, he said.
Global sugar prices are still falling, 18 months after reaching a 25-year high, as production surpasses demand and inventories increase.
Sugar futures are down 29% in the past year in London and are off 13% in New York.
After corn set a 10-year peak in February, US farmers increased plantings by an unprecedented 19% to 93 million acres—the most since 1944.
The US government-subsidized crop insurance guaranteed farmers a record $4 a bushel before any seeds were planted this year, and similar programmes will boost wheat acres, Tierney from John Stewart & Associates said.
India, the third largest importer of wheat last year, is unlikely to buy more because supplies are sufficient. The South Asian nation bought 1.3 mt in the past two months, equal to about one of every six bushels harvested in Kansas.
“We don’t need to import,” agriculture minister Sharad Pawar said in New Delhi on 19 September. “Our stocks are adequate.”
Prices are so high that livestock producers are reducing purchases and using alternatives. “We’ve been buying more corn to replace wheat,” said Kim Chi Young, purchasing manager with the Korea Feed Association, the country’s biggest foodgrain importer. Suppliers offered feed wheat in late August at $424.73 a tonne, Kim said. The price was 60% more than corn. General Mills Inc., the second largest US cereal maker, is raising prices to protect profits. The Minneapolis-based company last week said fiscal first quarter earnings rose 8.2% to $288.9 million.
“We’re monitoring the commodity environment very, very closely to see if we might have to pass on some additional costs,” said Kendall Powell, president and chief operating officer at General Mills Inc., where grains represent about 10% of its cost of goods.
Some wheat investors said poor weather may yet wipe out any gains from additional plantings. A 2.6% increase in harvested acreage this year failed to produce more grain after drought in Australia and rains in the US and Europe damaged crops.
“You can plant all the acres you want,” said Richard Crow, president of Crow Trading Inc., a $40 million agricultural commodity fund in Memphis, Tennessee. “You still have to have good weather.”
Goldman Sachs’s Gutman said wheat today reminds him of the nickel market earlier this year, where prices reached a record in May only to collapse about 50% in the next three months.
Morgan Stanley’s Hussein Allidina, global commodity research strategist in New York, said farmers should sell as much of next year’s crop as possible to lock in prices.