April 13, 2010

 

Biggest global wheat surplus sees bearish market

 

 

The world will have so much wheat this year that US farmers could leave every acre unplanted and still have a surplus, a sign of more losses after futures had their worst first quarter in 15 years.

 

A 34% jump in the combined harvests of Australia and Russia over two years is creating the biggest wheat glut since 2002, even as American growers sow the fewest acres in 39 years and the USDA raises its estimate of world output each month since June. Analysts expect an 8.6% price drop by July.

 

Two years after prices doubled, sparking food riots from Haiti to Indonesia, the US, Canada and Russia are battling for export markets. The 14% drop in the first quarter means lower costs and slower growth for grain processors including Archer Daniels Midland Co.

 

Wheat futures for July delivery closed April 9 at US$4.7925 in Chicago. Prices will fall to US$4.38 by the end of July, according to the average of 15 estimates in a Bloomberg survey last week.

 

US farmers, the biggest exporters, will see their share of the world market plunge to 19% this year, the lowest in at least five decades, down from 29% in 2008, government data show. Russia will supply 14%, up from 3% in 2004. Australia's 12% share has almost doubled since drought damage two years ago.

 

Rising supply made speculators on the CBOT the most bearish in February since at least 1993, US Commodity Futures Trading Commission data show. Short positions, or bets prices will fall, outnumbered longs by 60,457 contracts on February 12. As of April 6, the net-short holding was 55,427, the third-most since December 2005.

 

Prices dropped in seven of eight quarters since reaching a record US$13.495 in February 2008. The slide in the three months ended March 31 was the biggest for the period since 1995.

 

Meanwhile, US farmers plan to sow more corn and soy instead. Even though corn futures are down 14% this year, more than wheat's 11% drop, corn would yield US$168 more profit per acre, based on USDA cost estimates and CBOT prices.

 

Wheat will be planted on 53.827 million acres (21.8 million hectares) from September last year through June 2010, down 9% from a year earlier and the fewest since 1971, the USDA said March 31. The acreage for the US corn crop, the world's largest, will rise 2.7% to a three-year high, and soy will increase 0.8% to a record, the government said.

 

According to the USDA, global stockpiles by May 31, before this year's North American harvest, will reach an eight-year high of 195.82 million tonnes -  about 30% of total demand, the highest since 2004.

 

Even without a US crop, world inventories of 165.23 million tonnes and production of 618.11 million tonnes in the year ending May 31 would exceed estimated demand by 21%, according to USDA data. After wheat peaked, farmers produced a record 683.27 million tonnes in 2009.

 

Goldman Sachs Group Inc. expects the US planting drop to help absorb inventories, sending prices to US$5 a bushel in the next three months, US$5.50 by October and US$6 in a year. The New York-based firm's March 31 forecast is little changed from September, when Goldman cut its 12-month estimate to US$5.50 from US$6.25, citing bigger stockpiles.

 

China, the world's largest producer, may harvest 104.5 million tonnes in the year starting July 1, up from 101.4 million a year earlier, analysts said, adding that farmers planted 24.7 million hectares in the fall, up from 24.2 million a year earlier.

 

Additionally, India, the second-largest, will boost domestic sales to pare reserves, Farm Minister Sharad Pawar said March 18. The government wants to empty warehouses to make room for this year's record crop, which may top 80.28 million tonnes, and it may consider easing an export ban.

 

Russia, the largest exporter after the US and Canada, wants to double grain sales to 50 million tonnes in the decade, boosting revenue to US$9 billion from US$3.6 billion last year, said Pavel Skurikhin, the president of the Grain Producers' Union and chairman of Siberian Agrarian Holding Co.

 

The country is also sending trial shipments to Japan and Taiwan and sold wheat for the first time to Brazil this year, according to the agriculture ministry. The producers' union expects annual exports to Southeast Asia will reach 2 million tonnes in the next two to three years.