Too Much of Weed That Feeds Forcing Farmers to Ditch Wheat
Wheat is the weed that feeds. The grain-yielding grass is such a hearty plant that it is grown on more land than any other crop in the world. After four straight seasons of record harvests, bins are bulging from Kansas to Western Australia and prices are near the lowest in a decade.
But there are signs the glut may not last much longer, or at least that supplies may tighten enough to halt the four-year slump in wheat futures. Farmers are planting less because many are losing money. At the same time, global consumption is at an all-time high. And the risk of crop-damaging weather lingers over key exporting countries this year.
“It’s difficult to be overly bullish,” said Benjamin Bodart, a director at adviser CRM AgriCommodities in Newmarket, England. “The world is still awash with wheat. You cannot deny it. But when you dig a bit further, the downside now is fairly limited.”
While many money managers remain bearish—they’ve bet on lower prices for 17 months straight—wheat is expected to gain in 2017 for the first time in five years, according to a Bloomberg survey of 13 analysts. Rabobank says there is a “real possibility” of a supply shock in the U.S. and Europe if farmers shift to more profitable crops, and JPMorgan Chase & Co. predicts a stockpile drop this year of 8.4 percent.
It’s not difficult to see why the market slumped for so long. Wheat used in everything from bread to cakes and noodles thrives in all sorts of climates, and every few months there are crops being harvested somewhere in the world. Global production will reach an all-time high of 751.3 million metric tons once the current Southern Hemisphere harvest is complete, leaving stockpiles at 252.1 million tons, the most ever, U.S. Department of Agriculture data show.
Lower Prices
Prices tumbled 13 percent last year to $4.08 a bushel on the Chicago Board of Trade, touching a 10-year low of $3.8675 on Aug. 31 and extending the longest stretch of annual losses since 1999. The grain was one of the biggest commodity losers of 2016 and is down by more than half from its high in 2012. Milling wheat in France dropped 3.2 percent to 168 euros a ton, capping a four-year slide of 32 percent.
Russia, the world’s top exporter, said on Dec. 28 that its 2016 wheat harvest jumped 19 percent, more than analysts forecast. Farmers in Argentina are harvesting what will probably be their biggest crop since 2012, according to CRM AgriCommodities. And because wheat is sold in dollars on global markets, the currency’s strength is boosting the incentive for growers outside the U.S. to ship more, even with lower prices.
“For prices to move substantially higher from here, we need to see some signs of supply being restricted, either by a weather event or by the fact that production levels are curtailed,” said Fiona Boal, director of commodity research at London-based Fulcrum Asset Management LLP, which oversees about $5.2 billion.
Already the prolonged slump in prices has discouraged farmers. The London-based International Grains Council in November predicted a decline in global planting. That includes fewer acres for top consumer China and declines for major exporters, including the U.S., Canada, Australia and Kazakhstan.
Century Low
In the U.S., the No. 2 exporter, growers probably seeded the fewest acres of winter wheat in at least 104 years, according to the average estimate of 25 analysts surveyed by Bloomberg before a Jan. 12 USDA report. Winter wheat, the most-common variety grown in the country, is sown in the fall, goes dormant during the coldest months of the year, and is harvested in the spring.
Some farmers in Kansas, the largest U.S. producer of winter wheat, could lose money on every bushel, according to data from Kansas State University in Manhattan. The crop cost about $5.04 a bushel to grow in the state’s south-central areas, including land and labor expenses. That’s below the average national cash price for hard red wheat of $3.38 as of Jan. 6.
Wheat Surplus
A big reason for the wheat glut in recent years was mostly beneficial weather, which allowed crops to flourish and yields to improve. That may not last, Tracey Allen, an agricultural commodities analyst at JPMorgan in London, said in a Nov. 23 report.
In December, the condition of dormant U.S. wheat crops declined, including in Kansas, Oklahoma and Colorado, the USDA reported on Jan. 3. Parts of those states have received less than half of normal precipitation since early October, according to U.S. Drought Monitor. Through March 31, drought is likely to persist in western Kansas, eastern Colorado and most of Oklahoma, according a seasonal outlook from National Weather Service.
In parts of Ukraine, the fifth-largest exporter, the layer of snow that protects plants from freeze damage may be insufficient to shield some crops during a cold snap, researcher UkrAgroConsult said Jan. 5. The country has since been hit by snow blizzards and storms with temperatures of minus 25 degrees Celsius (minus 13 degrees Fahrenheit) in western regions, broker Veles-Agro said on Jan. 9.
Wheat Stockpiles
With the USDA predicting global wheat consumption rising 3.5 percent to a record 734.3 million tons in the 2016-17 season, JPMorgan says inventories will drop in 2018 to 228 million tons from an estimated 249 million this year.
Prices in 2017 will reach $4.50 a bushel and advance to $4.81 in 2018, according to the median estimates of analysts in the Bloomberg survey. They are up 4.7 percent so far this year in Chicago at $4.27 a bushel, off to the best start since 2010. Rabobank predicts futures will rally in each quarter this year, ending at at an average of $4.60 in the fourth quarter.
“Right now, we’ve fully digested all these big supplies, meaning big Russian crop, European crop, Australia, Canada, U.S.,” which means the slump in prices is mostly over, said Matt Ammermann, a commodity risk manager at brokerage INTL FCStone in Plymouth, Minnesota. “We are not going substantially lower.”
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