Global Policy Forum

Wheat Seen Rebounding 11% as Global Stockpiles Decline the Most Since 2007

Global wheat prices have doubled in the past two years due to a combination of factors, including changing weather and grain commodity speculation. Financial market mechanisms create perverse incentives resulting in farmers planting other crops such as soy and cotton chasing higher returns. In order to avoid such problems, governments should better regulate food commodities, particularity grains and cereals. This article analyses the causes of the decline in global stockpiles, such as export bans on farmers in Russia, crop production and increasing food prices resulting in riots.



By Rudy Ruitenberg, Whitney McFerron and Jeff Wilson

March 21, 2011



Wheat stockpiles shrinking the most in four years means prices will keep rebounding from their worst slump in at least a quarter century.

The grain will average $8 a bushel on the Chicago Board of Trade in the second quarter, 8.9 percent more than the $7.345 at which it last traded today, according to the median in a Bloomberg survey of 22 analysts. Contracts for delivery a year from now are priced at $8.6075, a gain of 17 percent. Farmers reaped 15.4 million metric tons less than demand this season, the biggest shortage in four years, and stockpiles will drop 7.8 percent, the U.S. Department of Agriculture says.

Wheat was the worst-performing commodity in the month to March 16. The drop accelerated after March 11 as the earthquake and tsunami that hit Japan roiled financial markets. Investors cut bets on raw materials after prices doubled in the past two years, speculating that consumption would plunge. That concern may not be justified because wheat demand fell just 0.8 percent in the season ended in 2008, amid the worst global recession since World War II.

"Global need for food is as strong as it was before the Japanese crisis," said Bill Gary, president of Commodity Information Systems Inc. in Oklahoma City, who has worked in grain markets for more than a half century. "We can only view the current state of market panic as eventually providing a buying opportunity."

Wheat fell 17 percent this year through March 16, its worst start since at least 1986. Hedge funds curbed bets on higher prices, cutting so-called net-long positions 58 percent since Feb. 8, according to U.S. regulatory data. Wheat is already rebounding, rising 11 percent in the past three sessions, the biggest such jump since December.

Agriculture Index

The S&P GSCI Agriculture Index of eight futures is still 71 percent higher than a year ago, a surge that means U.S. farm profit will jump 20 percent to a record $94.7 billion this year, the USDA estimates. It also means higher prices for everyone from Sam's Club, a unit of Wal-Mart Stores Inc., to General Mills Inc., the maker of Wheaties.

Wheat, corn and cotton as much as doubled since June and soybeans jumped 62 percent as a mixture of droughts and floods ruined crops. Some governments curbed exports and others hoarded food. Shortages may worsen should a prolonged price slump discourage growers from planting.

"The decline in prices now is sending absolutely the wrong message," said Roy Huckabay, an executive vice president for Linn Group, a brokerage operating from the CBOT. "There has never been a planting incentive this year for wheat compared with the returns offered for growing corn, soybeans or cotton."

Russian Farmers

Farmers in Russia, once the second-biggest wheat exporter, are planting the fewest acres in four years, in part because a government export ban kept prices low, a Bloomberg survey of producers, traders and analysts this month showed. Shipments stopped in August after the country's worst drought in at least a half century. Grain markets were already contending with drought across Europe and flooding in Canada by that time.

China, the largest wheat producer, faced drought earlier this year in the main region growing winter varieties. Concern eased after rains fell late last month and irrigation increased. There may be a "bumper summer grain harvest," Vice Minister of Agriculture Wei Chaoan said March 12.

"The fundamental situation for now hasn't improved, but we could have good weather everywhere and have very good supply," said Pierre Raye, an analyst at Paris-based InVivo, the largest French wheat exporter. France is the world's biggest shipper of the grain after the U.S.

Crop Production

Production in the crop year that begins in July will rise 3.7 percent to 672 million tons, according to the International Grains Council, a group of more than 50 nations.

The analysts surveyed by Bloomberg are already anticipating improved supply by the end of the year, with a median fourth- quarter average of $7.40 a bushel, 0.7 percent higher than now.

U.S. sowing will rise 7.2 percent to 57.44 million acres, according to a survey of growers by McHenry, Illinois-based Allendale Inc. Planting in the 27-nation European Union will advance 1.1 percent to 64 million acres, according to Copa- Cogeca, the regional farmers union based in Brussels.

That may be too little to fully replenish stockpiles. The combined inventory of the seven biggest exporting nations and the EU will drop 22 percent by the end of the current crop year, according to the London-based IGC.

Food Prices

Smaller stockpiles may mean more gains in food prices the United Nations says reached a record last month. Rising food costs contributed to protests across northern Africa and the Middle East, driving up inflation and spurring central banks to consider higher interest rates that may slow global growth.

The riots from Bahrain to Morocco drove wheat prices higher because governments accelerated purchases to expand stockpiles, damp prices and quell unrest. Shipments to North Africa from Rouen, Europe's biggest cereal-export hub, rose to a 16-week high in the week ended March 9, data from the French port show.

The extra demand is draining stockpiles at a time when export curbs are still in place in Russia and Ukraine. Russian First Deputy Prime Minister Viktor Zubkov said March 2 a ban may be extended from July through the end of 2011. France may start running out of wheat for export as early as this month, according to FranceAgriMer, the national crops office.

In the U.S., snow and rain saturated soil and increased the risk of flooding that may delay spring-wheat planting in North Dakota, the biggest producing state. Dry weather in Kansas, the second-biggest grower, left only 26 percent of crops in good or excellent condition, the worst since 2006, according to the USDA.

Bakery Products

The jump in wheat means higher costs for bakery products and meat, Brian C. Cornell, president and chief executive officer of Sam's Club, told an investor conference March 8. General Mills raised some prices this year because of raw materials, Chief Financial Officer Donal Leo Mulligan told a conference Feb. 22.

U.S. food costs will rise as much as 4 percent this year, more than the 2 percent to 3 percent estimated in January, the USDA said Feb. 24.

Investors in options on CBOT futures also may be anticipating a resumption of the rally in wheat. The most widely held option gives holders the right to buy grain at $10 a bushel by April.

Hedge funds and other speculators increased their net-long position in CBOT wheat by 4.6 percent to 21,931 contracts by March 15, the highest since mid-February, according to data from the U.S. Commodity Futures Trading Commission.

"People will need to eat wheat, no matter what," said Keith Flury, part of a team of analysts at Rabobank International in London who correctly predicted this year's surge in food costs. "The underlying fundamentals in the market are still there."


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