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The world's got a wheat problem

It's shaping up to be a rough year for a whole lot of wheat farmers around the world. Whether it's too much moisture or too little, Mother Nature is bringing the pain to a sector that's already facing a tight world supply situation and, as it gets tighter, prices could be just getting started on their upward climb.

It's too dry in the U.S., Britain, eastern Europe, and Australia. And it's too wet in Argentina, where farmers are struggling to get what crop they do have harvested. No matter the weather extreme, it's creating a consistent likely outcome: Less wheat on the world market in the coming months.

Around the wheat world

Argentina's the anomaly in the world wheat situation. Too much rain in that country has played hell with that country's crop progress, both row crops and small grains. Farmers there are struggling to get their corn and soybeans planted while they try to get the wheat crop harvested, says Mauricio Torres, a crop adviser with BLD Agencia Chacabuco in the Chacabuco province, just west of Buenos Aires, Argentina. With more rain in the forecast in the next week, the problem may not go away anytime soon.

"It rained again last night and continues to delay the planting and harvesting of barley. Wheat harvest in the northem provinces has already begun, and there's not very good yields and quality," Torres says. "And it is not normal to have rains curb both. The soil is heavily loaded by the heavy rains, which have generated many drawbacks."

Staying in the Americas, the U.S. crop's suffering from the opposite problem. Crop ratings in the last few weeks' USDA-NASS Crop Progress reports (which ended with the November 26 report until April 2013) have been some of the lowest on record for that crop, and the severe shortage of moisture in the Plains states has some farmers already thinking of abandoning their crop before dormancy rolls in.

"We've struggled from a lack of precipitation to get a good stand. There's the possibility growers are starting to think about abandoning their crop. It's maybe just a little early to do that," says University of Nebraska Extension cropping systems specialist Greg Kruger. "We've had unusually warm weather this fall. If we can get a little precipitation on these warm days, maybe a little more wheat will come, and we could get a little better stands. But at this point, there's nothing else we're going to plant this fall. Leaving that crop until spring would behoove most growers."

Now, head across the pond to the UK, where drought's been the culprit of yield potential and a tightening of already tight supplies in the pipeline, according to a report from the UK Agriculture & Horticulture Development Board's Home Grown Cereals Authority (HGCA). Recent farmer surveys from that group indicate "weights are the poorest on record.

"Results also confirm this as the biggest domestic issue by far for the 2012/13 season despite satisfactory protein levels," according to an HGCA report. Overall, HGCA specialists say they expect crop output to fall at least 13% behind normal. Ordinarily, that would be a problem of moderate consequence. This year's going to be different.

"With a 13% reduced production and an estimated 7% increase in domestic demand, supply of wheat from the UK will be limited, with current estimates . . . putting export availability at a historic low level of just 750,000 tonnes," according to an HGCA report.

Now, head east to the Steppe region of Russia and Ukraine. The agriculture ministry in Ukraine reported this week that nation's crop, the harvest of nearing completion, is coming in just shy of 20% less than normal, reports indicate. The situation is similar in Russia, and it's caused officials in both nations to mull banning exports to ensure they can meet domestic needs.

See more on crop conditions in Your World in Agriculture

Now, loop around the globe and south to Australia, where farmers have faced problems similar to those in the U.S. and Europe. The drought's already trimmed that nation's projected wheat output and "there will certainly be plenty of adjusting to do" as harvest advances, says Market Analyst Louise Gartner.

"Australia is looking at some open weather to get the harvest rolling, but reports to date suggest quality is suspect there as well," Gartner adds. "Production prospects in Australia are also declining with recent estimates hovering at the 19 MMT level, down 1 MMT from earlier estimates."

Market implications

The wheat market's generally marched alongside corn and soybeans, at least in the U.S. marketplace, for the last few months. But, will these worldwide weather problems precede a decoupling of the pits and surge in wheat alone? It all depends on just how much longer end-users can and will continue to pay for a commodity with a lot of upside potential.

"I think we're just here waiting on the end-user," says U.S. Commodities grain broker and market analyst Don Roose. "There are more people in the market living hand-to-mouth and we're already at high levels. It's not like prices have scared anybody, but what this does is we keep gradually tightening down this market."

Wheat's unique to other grains in that "there's a wheat harvest going on somewhere" most of the year, and as such, there's always a supply moving into the market, even if it's one region's short crop. The fact that so many areas this year are facing potentially short crops has "supply worries building," Roose says.

Moving forward, there are expectations that Argentina and Australia will still raise "some sizable crop" because of how advanced those nations' crops are right now. The biggest question mark remains in North America.

"It's too wet in Argentina, Russia and Ukraine are pulling back on exports, and the EU is having a short crop," Roose says. "We're really counting on a big crop in North America, but we're struggling with drought ourselves."

Right now, there's less tightness in the wheat sector than in corn and soybeans, Roose adds. If things do start tightening up to those levels, though, look for changes in the structure of the market.

"If you have bull spreads moving precipitously, if March wheat gains on the May contract, that would be one sign," Roose says. "I think we're high enough here, and as we start to jockey around through the end of January, it will start getting more interesting."

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