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Hackett Advisors in the News


Wheat Takes a Midyear Turn

Commodities Corner | SATURDAY, JULY 24, 2010

By ANGIE POINTER

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 week.

For 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 western prairies.

But 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 even smaller.

 

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.

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