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Drought to support wheat prices

02/13/2013 @ 7:03am

Global wheat prices are close to bottoming out and may rise in coming months because of lingering drought in the U.S. and smaller crops in exporting countries including Australia and Russia and Argentina.

Higher prices would result in costlier imports by Asian countries, higher returns to growers and switching by animal-feed millers to relatively cheaper corn instead of wheat.

Benchmark wheat prices rose to a multi-year high of $9.4725/bushel July 23 but have since eased. CBOT March wheat settled at a seven-month low of $7.32/bushel Tuesday in response to rain and snow slightly easing drought conditions in parts of the U.S.

The Taiwan Flour Millers' Association recently purchased U.S. Western White wheat with 9% protein around $343.77/ton, or $9.35/bushel, FOB, up by over $11/ton since mid-November. Some traders and analysts expect prices to test $350/ton if the U.S. drought continues.

The United Nations Food and Agriculture Organization, in forecasts released Thursday, said global wheat inventories will decline 10% in the year ending June 30.

"There is a supply stress in wheat which is expected to continue in the first half of the year," says Abdolreza Abbassian, FAO senior grains economist.

Recent rain and snow in the drought-hit U.S. Plains is said by some experts as insufficient and late.

"In many regions west of the Mississippi River soil moisture is deficient, there is a lack of snow cover and we definitely need more rain," Jay O'Neil, senior agricultural economist at Kansas State University told Dow Jones Newswires.

He said several Hard Red Winter wheat growing regions in Nebraska, Kansas, Oklahoma and eastern Colorado continue to face dry weather conditions.

"Many fields [in the U.S.] did not sprout at all; some are so spotty that they will be used to graze cattle rather than harvest wheat," S. Elwynn Taylor, a senior agronomist at Iowa State University said.

Citing weak export demand for U.S. wheat, Goldman Sachs Group Inc. analyst Damien Courvalin has slashed his three-month price forecast for Chicago wheat futures to $7.80 a bushel from $9.50 a bushel--but this is still well above current prices.

ANZ Banking Group forecasts wheat futures on CBOT will average $8.38/bushel in the second quarter.

The U.S. drought is reflected in the widening premium HRW Kansas City Board of Trade wheat futures are commanding over soft wheat contracts on CBOT. KCBT wheat for July delivery has a premium of around 46 cents/bushel over the CBOT July contract, up from 15 cents five months ago.

This may widen further, to 70 cents in the second quarter of 2013, because of a revival in demand for U.S. wheat and tight global supply, says Paul Deane, Melbourne-based senior agricultural economist with ANZ Banking Group.

Adding to global supply problems is last summer's drought in the Black Sea region, which cut Ukrainian wheat output in the year ending June 2013 by 29% to 15.8 million tons and Russia's by 32% to 38 million tons, the London-based International Grains Council says.

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