Wheat Takes a Midyear Turn
Corner | SATURDAY, JULY 24, 2010
Weather woes in Canada, Russia and elsewhere push the grain's
prices higher despite prospects of record yields in the U.S.
EXTREME WEATHER is
heating up wheat prices.
A drought across Europe and
Russia and excessive rains in Canada have cut expectations for global wheat
production and thus propelled prices higher in short order. Since late June,
Chicago Board of Trade prices have risen nearly 30%. On Friday, September
wheat, the most active contract, settled at $5.9625 a bushel, up 1.5% on the
much of the year, wheat has been depressed because of
expectations that global production would be high and
would add to the current surplus. But that outlook began
to change this summer. The first rumblings of a problem
came from Canada, says Ken Morrison, founder and editor
of Morrison on the Markets, an online newsletter based
in St. Louis. Excessive rains kept farmers from planting
wheat and other crops on millions of acres in Canada's
it wasn't until talk of a Russian sukhovei—a hot,
dry wind that can devastate crops—blew through
the market that wheat really caught fire. Russian
analysts say that the bulk of crop damage came
not from the sukhovei itself, but from ongoing
excessive heat and drought conditions. Russia's
agriculture minister says that nearly 24 million
acres of cropland, including acres planted with
wheat, have been ruined. The U.S. Department of
Agriculture estimated this month that 2010-11
Russian wheat output would fall to 53 million
metric tons, an 8% drop from its June forecast,
but many analysts believe the harvest will be
Other European wheat crops are
feeling the pinch, too. Strategie Grains, a Paris consultancy, cut its forecast
for production in the European Union 2.8%, to 129.8 million tons. And in
Australia, wheat production could be threatened by a plague of locusts.
"The kind of wheat losses we're
seeing are catastrophically large," says Shawn Hackett, president of Hackett
Financial Advisors. "That's really changed the dynamics for wheat." He's
advising clients to buy wheat on any corrections because the weather-driven
rally most likely won't wind down anytime soon.
YET SOME ANALYSTS SAY IT'S
HARD to get overly bullish on wheat just yet, especially
considering strong production from the U.S. Despite 8% fewer acres planted this
season, the Agriculture Department expects U.S. wheat production in 2010-11 to
replicate last year's 2.22 billion bushels, thanks to a record average yield.
The potential is high for reaching that estimate; winter-wheat harvests have
been strong, and 82% of the U.S. spring-wheat crop is in good-to-excellent
condition, boding well for yields.
Still, analysts agree that the
global potential to produce more of the grain is shrinking rapidly, and that
the market will be acutely sensitive to weather in the weeks to come. "We still
have adequate wheat, but there is less of it than we thought," Morrison says.
German consultancy F.O. Licht estimates that 2010-11 world wheat production
will fall 2.8% from last year's level, to 658.74 million tons, because of the
widespread weather problems.
If Mother Nature continues to
wreak havoc on the world's wheat fields, prices will go higher.