May 24, 2012

(Bloomberg News) Droughts withering wheat crops from the U.S. to Russia to Australia will probably spur the biggest reduction in global supply estimates since 2003 and drive prices to the highest in almost a year.

Kansas, the top U.S. grower of winter wheat, is poised for its driest May on record, the state's climatologist estimates. Ukraine and Russia, accounting for 11 percent of world output, have endured drought conditions for three months, University College London data show. The U.S. Department of Agriculture may cut its global crop estimate by 1.2 percent next month, the biggest drop in a June report since 2003, according to the average of 18 analyst estimates compiled by Bloomberg.

Wheat traded in Chicago rose as much as 18 percent in the 10 days through May 21 on concern that the market is returning to the droughts of 2010. Russia and Ukraine curbed exports that year and prices more than doubled to $9.1675 a bushel by February 2011, the month in which world food costs tracked by the United Nations reached a record. Analysts surveyed by Bloomberg expect futures to rise 13 percent to $7.51 by mid- July.

"In 2010, everyone was talking about dryness in Russia even in May, but no one was paying attention," said Chris Gadd, an analyst at Macquarie Group Ltd. in London. "Because you've had the history of 2010, people are going to the other extreme and overreacting a little. If weather conditions deteriorate further, production estimates could go a lot lower."

Gasoline and Cattle

Futures surged to an eight-month high of $7.22 on May 21 on the Chicago Board of Trade, and settled at $6.655 yesterday. The grain's 2 percent advance this year makes it the fourth-best performer in the Standard & Poor's GSCI Index of 24 commodities behind soybeans, cattle and gasoline. The gauge's 4.4 percent drop since the start of January compares with a 0.1 percent gain in the MSCI All-Country World Index of equities. Treasuries returned 1 percent, a Bank of America Corp. index shows.

The USDA said May 10 that global wheat output will decline 2.5 percent to 677.56 million metric tons in the crop year beginning June 1, leaving stockpiles of 188.1 million tons at the lowest relative to demand since 2009. The department will probably cut the production forecast to 669.15 million tons in its June 12 report and reduce the inventory estimate to 183.3 million tons, according to the Bloomberg survey.

Dry Kansas

Kansas got 0.39 inch (0.99 centimeter) of rain in the first 20 days of May, according to Mary Knapp, the state's climatologist. The record low of 0.98 inch for the entire month was set in 1966, the Manhattan, Kansas-based scientist said. Analysts were predicting record wheat yields for the state as recently as three weeks ago.

As much as 30 percent of the grain harvest in eastern and southern Ukraine may be lost because of damage from dry weather, said Tetiana Adamenko, the head of the agro-meteorology department at the National Meteorology Center in Kiev. Russian wheat output may drop 15 percent this year if below-average rainfall persists in southern regions during the flowering period for the next two weeks, Macquarie estimates.

While dry weather is depriving winter plants of the water needed to develop kernels, there's still time for improvements before harvesting starts next month. Futures jumped 29 percent in July and August last year because of concern about drought, before tumbling 23 percent in the following month as rainfall revived crops and harvests exceeded analysts' estimates.

Crop Projections

Winter wheat accounted for about 75 percent of U.S. output last year and is the main variety grown in the Black Sea region. The U.S. National Centers for Environmental Prediction, a unit of the National Weather Service, said May 22 that rainfall will be as much as four times above normal over the following week in eastern Ukraine and southwest Russia.

"Rain may be coming just in the nick of time" for Russia's southern growing regions, which produce about 28 percent of the nation's crop, said Gail Martell, the president of Martell Crop Projections in Whitefish Bay, Wisconsin.

This month's surge in prices was also caused by speculators buying contracts to reverse wrong-way wagers on a decline, said Jim Hemminger, a risk-management specialist at Top Third Ag Marketing in Chicago. Hedge funds and other money managers held a net-short position of 50,057 futures and options in the week ended May 15, the most in a month, data from the Commodity Futures Trading Commission show. A CBOT futures contract represents 5,000 bushels and the CFTC updates the data tomorrow.

Russia and Ukraine

The funds were also betting on lower prices in May 2010, three months before Russia and Ukraine imposed export curbs after drought decimated their crops. Russian production plunged 33 percent and Ukraine's harvest slumped 19 percent, USDA data show. A basket of 55 foods tracked by the United Nations jumped 32 percent in the next seven months, reaching a record in February 2011. The gauge fell 10 percent since then.

The rain that fell in the past several days in east and south Ukraine won't be enough to revive wheat and barley crops, said Adamenko of the National Meteorology Center in Kiev. The stress on plants extends into neighboring Russia and Kazakhstan, and rain would slow the decline in yields rather than reverse it, said Don Keeney, a senior agricultural meteorologist for MDA EarthSat Weather/CropCast in Gaithersburg, Maryland.

Warmer Weather

Kansas will be mostly dry with only scattered light showers for the next week, and temperatures will be warmer than normal, Mike Palmerino, an agricultural meteorologist at Telvent DTN in Minneapolis, said in a May 23 report. As recently as May 3, yields were forecast at a record 49.1 bushels an acre by the Wheat Quality Council, after the industry group tallied 608 samples from its annual three-day tour of fields.

The outlook is no better in Western Australia, which produces 40 percent of the country's wheat. The state had below- average rainfall in April, according to the Bureau of Meteorology. Production in Australia, the second-biggest exporter after the U.S., will drop 12 percent to 26 million tons in the year through May 2013, USDA data show.

Wheat fields in France, Germany and Poland, which account for about 10 percent of global output, were damaged by unusually cold weather in February. The 27-nation European Union cut its outlook for soft-wheat production to 126.7 million tons last month, about 4.7 percent less than forecast in March.

"Across the board, we have production concerns," said Shawn McCambridge, the senior grain analyst for Jefferies Bache LLC in Chicago. "If we do see that hot, dry pattern come in, it's not an opportune time for the crop."