July 19, 2010

Glut may restrain CBOT wheat prices

The five-week rally in wheat futures is under threat as prospects for the second-biggest stockpiles in almost a decade overwhelm drought damage.

Wheat rose 37% to US$5.8725 a bushel in Chicago since June 9 as a lack of rain in Russia, Kazakhstan and the EU and floods in Canada hurt crops. That prompted the USDA on July 9 to cut harvest estimates by 1.1%, while global inventories will be the second-highest since 2002.

"I don't think prices will hold these higher levels," said Pete Sorrentino, who helps manage US$13.1 billion at Huntington Asset Advisors in Cincinnati and correctly predicted the 2008 crash in commodity prices. "We're going to be getting some massive harvests, and that's going to keep stockpiles swelling."

The 50% jump in stockpiles from a quarter-century low in 2008 shows there is little chance of a return to the record US$13.495 reached that year and the food riots that erupted from Haiti to Egypt. The world's poorest nations will spend 37% less on cereal imports this year than at the peak, according to the United Nations, whose food-price index has fallen 24% from an all-time high in June 2008. Cheaper wheat may boost profit for Kellogg Co., the largest US cereal maker, and General Mills Inc.

Wheat's surge since June 9 is the biggest in the Standard & Poor's GSCI Index of 24 commodities. The gain topped corn's 20% advance and is more than three times the 9.9% jump in soy. The S&P GSCI Total Return Index, tracking the net amount investors received, advanced 2% over the same period. The gauge slumped 46% in 2008, the worst crash since at least 1970.

For now, traders are focused on production rather than stockpiles. Wheat futures traded on the CBOT jumped 9.2% last week, the biggest gain since November, after drought worsened in Russia and lower grain output was forecast in Kazakhstan, Germany and France. All the countries are exporters.