Wheat, Corn Stockpiles Dwindle After Russia’s Drought
Wheat, corn stockpiles dwindle, Russia drought curbs output
Alexander Zemlianichenko Jr/Bloomberg
Corn prices are up 24 percent in the past year.
Corn prices are up 24 percent in the past year. Photographer: Alexander Zemlianichenko Jr/Bloomberg
Aug. 11 (Bloomberg) -- Colin Fenton, chief executive officer of Curium Capital Advisors, talks about the outlook for commodities and investment strategy. Fenton speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
The world’s appetite for meat, flour and ethanol is expanding faster than the supply of the crops needed to produce them, eroding inventories and increasing the chance of accelerating food prices.
Wheat stockpiles may slip to a two-year low as demand rises and a drought damages the crop in Russia, whose exports will plunge 84 percent, the U.S. Department of Agriculture said today. Inventories of corn, used to feed livestock and make fuel, will be little changed from a year earlier, even as output rises to a record, the USDA said.
Russia’s worst dry spell in 50 years sent Chicago wheat futures to a 23-month high on Aug. 6. Corn prices are up 24 percent in the past year, as ethanol mills use 35 percent of the grain produced in the U.S., the world’s largest exporter, and rising global incomes lead to more beef and pork consumption.
“The world doesn’t have enough exportable supplies to meet demand” for wheat and feed grains, said John Macintosh, 61, a vice president at Rand Financial Services Inc. in Chicago who has been trading agricultural commodities since he was with Continental Grain in 1973.
Russia, the third-largest wheat exporter last year, will ban shipments starting Aug. 15 after concluding that its grain harvest may plunge 38 percent this year to 60 million metric tons. Dmitry Rylko, a director at the Moscow-based Institute for Agricultural Market Studies, said yesterday that the estimate may be cut further because of the worsening drought.
Ukraine Quotas
Ukraine, the world’s biggest barley exporter, may impose export quotas on 5 million metric tons of wheat and barley, effective Sept. 15, Volodymyr Klymenko, the head of the country’s grain association, said today.
While wheat prices dropped 11 percent in the past four sessions to $7.25 a bushel yesterday on the Chicago Board of Trade, they’re still up 58 percent since the end of May. The December contract today was 2.4 percent higher at $7.4225 a bushel at 7:14 a.m. in Chicago. In 2008, record crop prices led to food riots and export bans from Haiti to Egypt.
World food prices rose for the first time in three months in July on higher costs for cereals and sugar, the United Nations’ Food and Agriculture Organization said on July 29. The USDA said July 23 that meat prices will rise faster than expected this year at 2 percent to 3 percent.
Premier Foods Plc, the St. Albans, England-based maker of the Hovis brand, said Aug. 5 that higher wheat costs mean an “inevitable increase” in bread prices.
Food Crisis
Pakistan may be forced to import more grain as the deadliest floods in the nation’s history damaged more than a million acres of sugar cane, cotton and rice fields and caused 250 billion rupees ($2.9 billion) of agricultural losses, including losses of wheat, animal fodder and livestock.
“We might see higher grain trade across the globe” as Pakistan steps up purchases, said Amol Tilak, a senior research analyst at Kotak Commodity Services Ltd. in Mumbai.
Another global food crisis is possible if wheat drives the prices higher for other staples, according to Franciscus Welirang, chairman of the Flour Mills Association in Indonesia, the nation’s largest buyer of the grain.
“There will be a domino reaction, and we expect corn demand will rise, pushing prices higher, and feed industries will buy more corn and soybeans,” Welirang said on Aug. 6. “It’s the end of cheap wheat.”
No Pass-Through
The wheat rally will need to last longer to boost costs for consumers, according to Bill Lapp, the president of Advanced Economic Solutions in Omaha, Nebraska, and the former chief economist for ConAgra Foods Inc.
“I don’t think it’s going to immediately pass through,” Lapp said Aug. 5. “It’s been a dramatic increase, but you have end users who have at least some inventory, and probably more coverage than they had two years ago,” he said. In February 2008, Chicago wheat futures jumped to a record $13.495 a bushel.
“We’re going from an incredibly burdensome supply down to just above normal, so this is not a shortage,” said Rich Nelson, the director of research at commodity broker Allendale Inc. in McHenry, Illinois.
The USDA cut its estimate of world wheat inventories by more than analysts expected today. Stockpiles before the next Northern Hemisphere harvest will fall to 174.8 million tons, compared with last month’s forecast of 187.05 million and an estimate of 178.8 million by 17 analysts in a Bloomberg survey. A year earlier, stockpiles were 193.97 million.
Russia Export Cuts
“Russia is going to cut back on exporting,” which will boost demand for supplies from the U.S., Canada and the European Union, said Alan Brugler, the president of Brugler Marketing & Management LLC in Omaha, Nebraska.
The USDA slashed its export forecast for Russia to 3 million metric tons, down from 18.5 million shipped a year earlier and last month’s forecast of 15 million.
“The trade is guessing that the Russian wheat crop is anywhere from 20 percent to 40 percent devastated,” Allendale’s Nelson said. “At this point, we don’t know what it’s going to be. They’re into harvest in key drought areas right now.”
A prolonged drought may further erode supplies by damaging next year’s crop.
Miracle Needed
“It has the potential to be very explosive the next five weeks because by then we will know if Russia gets enough rain to plant its winter-grain crops,” Rand Financial’s Macintosh said. “It will take a miracle for Russia to get enough rain to get winter crops fully established” before freezing temperatures arrive at the end of September, he said.
“Russia is not going to let any food out of the region,” he said. “Wheat, barley, corn, oilseeds, hay or potatoes that were going to be harvested from July to October have been severely damaged. No one is prepared for this shortfall.”
World corn inventories before next year’s harvest probably will total 139.2 million tons, little changed from 139.03 million a year earlier, the USDA said. Stockpiles of coarse grains, including corn, sorghum, barley, oats and rye, will drop 8.4 percent to 172.04 million tons, the lowest level since 2008, the department said.
The corn forecast is down 1.3 percent from the 141.08 million that the department expected last month. U.S. ethanol use will jump to 4.7 billion bushels, or 35 percent of estimated production of 13.365 billion bushels. Global feed use will rise to an estimated at 493.65 million tons today.
Meat, Dairy
Meat and dairy demand has grown more than any other major commodity group since 1980, according to the FAO. Global meat consumption totaled 41.2 pounds per capita in 2005, a 37 percent increase from 30 pounds in 1980. Developing countries including China and Brazil are eating twice as much as in 1980, at 30.9 pounds per capita, the FAO said.
In the U.S., it takes 11.9 bushels of corn, 143 pounds soybean meal and 33 pounds of dried distillers grains to feed a hog from birth to slaughter, said Altin Kalo, a commodity analyst for Steiner Consulting Group in Manchester, New Hampshire. Cattle eat 49.3 bushels of corn, 1.025 tons of dried distillers grains and 0.362 tons hay to reach an 820-pound carcass weight, Kalo said.
“The big wildcard is what the USDA is going to show for corn production,” Brugler said. “It’s going to be a big number.”
The global crop will be a record 831.59 million tons, up 2.9 percent from a year earlier, including a 1.9 percent increase from last year’s record in the U.S., according to the USDA.
“It’s probably going to be the highest number of the year,” Brugler said. The USDA is “probably going to find more ears per acre than they did last year, with record high ears per acre.”
To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Whitney McFerron in Chicago at wmcferron1@bloomberg.net.
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.
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