Nov. 2 (Bloomberg) -- Wheat’s steepest weekly drop since December may be just the start of a fourth-quarter slump as the biggest harvests on record turn this year into the worst for prices since 1990.

Wheat will decline 13 percent to $4.30 a bushel in Chicago by the end of December, according to Emmanuel Jayet, head of agricultural-commodities research at Societe Generale in Paris. Prices had staged the biggest October rally in at least 50 years, rising 26 percent to $5.7475 on Oct. 23, after rain delayed U.S. planting. Last week’s 9.8 percent drop shows the gains were “overdone,” Jayet said.

Global output rose 12 percent to a record 682.3 million metric tons in the year through May and will total 668.1 million in the current season, the second-most ever, the U.S. Department of Agriculture said Oct. 9. The surplus will likely lower costs for General Mills Inc., the maker of Cheerios cereal, and reduce profit for flour millers including ConAgra Foods Inc.

“Inventories are more negative for wheat than just about any other commodity in the world,” said John Brynjolfsson, the chief investment officer of hedge fund Armored Wolf LLC in Aliso Viejo, California. “There is a glut.”

Stockpiles worldwide will jump 12 percent by the end of May to 186.7 million tons (6.9 billion bushels), or almost 19 times more than what’s harvested in Kansas, the USDA estimates.

Leftovers from this season’s crop will equal 29 percent of what’s needed in the current marketing, the biggest buffer since 2003, when the grain was 31 percent cheaper. While demand is the highest ever, the supply of inventories from last year plus what is produced in the coming season will be a record 834.9 million tons, the agency estimates.

Options, Planting Surge

Investors are signaling further declines. On Oct. 30, there were 6,265 December put options at $4.50 a bushel, more than any other contract to sell the grain and 9 percent less than that day’s close of $4.9425 on the Chicago Board of Trade. The last decline of at least that amount during the final two months of the year was a 19 percent drop in 2002.

Armored Wolf’s Brynjolfsson said prices may trade as low as $4. A decline of that much by the end of December would mark a 35 percent slide for the year, the most since 1990.

Wheat, the world’s most-planted crop, was among the best- performing commodities early last year, as concerns about food shortages sparked more than 60 food riots from Bangladesh to the Ivory Coast to Haiti. The price surged to a record $13.495 a bushel in February 2008, triple the year-earlier level, prompting farmers to increase planting from Australia to Canada.

Futures fell 29 percent in the second half of 2008 as the recession and strengthening dollar eroded commodity demand. They lost 25 percent in the first nine months of this year, the biggest drop among 24 futures tracked by the Standard & Poor’s GSCI Commodity Index.

General Mills Wins

General Mills said Sept. 23 that lower costs for wheat and fuel helped boost profit margins in the fiscal first quarter. The Minneapolis-based company, which makes Gold Medal Flour and Pillsbury baked goods, expects falling flour prices in 2010, Chief Executive Officer Kendall J. Powell told analysts on a Sept. 23 conference call.

Omaha-based ConAgra, which produces flour for restaurants and food makers, said Sept. 22 that low prices may contribute to a decline in its milling profit. In the fiscal quarter ended Aug. 30, ConAgra Mills saw sales drop by more than $100 million.

Prices rebounded last month after U.S. growing areas got as much as 10 inches (25 centimeters) of rain, or more than six times the normal amount. About 76 percent of the so-called winter-wheat fields were planted as of Oct. 26, compared with a five-year average of 85 percent, the USDA said. Winter varieties account for 70 percent of output in the U.S., the world’s largest exporter.

Late Planting

As farmers struggled to sow fields, they also fell behind in harvests, collecting corn at less than half the average pace and soybeans at 64 percent of the normal rate, USDA data show.

Wheat futures jumped as much as 26 percent to a two-month high of $5.7475 on Oct. 23. Had the month ended then, the rally would have been the steepest for October since at least 1959, exchange data show. The market resumed its slide last week as the dollar rose and the global supply outlook improved.

“While there were localized concerns, the crop is still generally in pretty good shape,” said Mitch Morison, general manager of commodities at Melbourne-based AWB Ltd., Australia’s former monopoly wheat exporter. “The market got a little ahead of itself.”

The International Grains Council said Oct. 29 that global stockpiles will rise to 188 million tons at the end of June from 165 million tons a year earlier, up from a September forecast, as production exceeds demand for a second year.

Dollar’s Drop

Wheat may get a boost if the dollar resumes its slide. The currency weakened to a 14-month low against the euro on Oct. 26, sparking demand for commodities from oil to sugar to cotton. Gold reached a record $1,072 an ounce on Oct. 14, and copper has doubled this year.

Hedge-fund managers and other speculators have become less bearish, trimming bets on declines in six of the past seven weeks. So-called net-short positions in Chicago futures and options, excluding those held by index funds, dropped 52 percent since Sept. 11.

To some analysts, prospects are improving because this year’s decline may lead farmers to reserve land instead for corn and soybeans. More rain in the weeks ahead may force growers to abandon wheat altogether.

“There are increasingly positive signs that we will see some upside for prices in 2010/11, as production around the world is adjusted downwards with growers responding to the current lower prices,” Luke Chandler, an analyst at Rabobank Group, the world’s largest lender to agricultural producers, said Oct. 22.

Big Foreign Crops

Whatever happens in the U.S., bigger crops in Canada, the European Union, the former Soviet Union and Argentina will help compensate, said Dan Cekander, the director of grain research at Newedge LLC in Chicago.

In the European Union, stockpiles rose 48 percent in the year that ended May 31. Russian and Canadian farmers harvested bigger crops from a year earlier, USDA data show.

“You are already past the major problem areas for this season in a lot of areas, so right now, it’d be difficult to have a real production scare in wheat for the next couple of months,” said Ed Jernigan, the managing director, Australia, for INTL FCStone Inc. in Sydney.

Another concern for U.S. growers is increasing international competition. Shipments since the crop marketing year began June 1 have plunged 30 percent to 12.9 million tons, based on USDA data as of Oct. 15.

U.S. Losing Customers

U.S. grain sells for about $10 a ton more than supplies from France and Russia, Societe Generale’s Jayet estimates. Soft-red winter wheat at Gulf of Mexico ports fetched $210 a ton on Oct. 23, the highest since June, according to data from F.O. Licht. Egypt, the world’s biggest importer, bought 180,000 tons from France at $189.50 a ton on Oct. 15, two weeks after purchasing 150,000 tons from Russia for $170 a ton.

“Recent major purchases by Iraq, Jordan and Egypt were for more competitively priced European and Black Sea wheat,” Jayet said. “U.S. wheat is not competitive at all.”

To contact the reporters on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net; Madelene Pearson in Melbourne on mpearson1@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net.

Last Updated: November 1, 2009 19:00 EST