Wheat to Beat Other Agricultural Commodities, Barclays Says

Wheat may be the best-performing agricultural commodity in the second half as lower shipments from the Black Sea region create “ripple effects” that support prices, Barclays Capital said.

Prices may peak as high as $9 a bushel in Chicago, 21 percent higher than yesterday’s close, as importers seek alternative supplies after Russia declared an export ban and on expectations that Ukraine and Kazakhstan will curb shipments because of dry weather, Sudakshina Unnikrishnan, a vice president at Barclays, said in an interview yesterday.

Sugar, which rose to a 29-year high in February, may be the worst performer as the global market swings to a surplus after two years of deficit, causing prices to tumble, Unnikrishnan said in Singapore.

More expensive wheat may encourage buyers to switch to products like rice and corn, dragging other commodities higher and fueling “fears of contagion into food prices,” HSBC Global Research economists including Karen Ward and Frederic Neumann said in a report.

Wheat futures surged to the highest price in almost two years on Aug. 6, a day after Russia declared a ban on grain exports amid the worst drought in at least 50 years and the country’s Prime Minister Vladimir Putin proposed that Kazakhstan and Belarus follow suit. The December-delivery contract was little changed at $7.43 a bushel at 8:31 a.m. Singapore time.

Futures have jumped 75 percent from this year’s low of $4.255 a bushel on June 9 on concern that excessive rains in Canada, drought in Russia and other exporting countries in the former Soviet Union and dry weather in other parts of Europe will curb global supply.

Price Contagion

“With wheat being at the start of the food chain, fears of a contagion in food prices are more understandable,” HSBC economists wrote in an Aug. 9 report. “If it starts to affect the price of foodstuffs more broadly, we may be in for more of a problem,” the report said.

Wheat is milled into flour used in making bread, pasta and noodles. The grain can also be used interchangeably with corn as a main ingredient in livestock feed. A jump in wheat prices may push prices of pork, beef and chicken and dairy products higher, Chung Yang Ker, an analyst at Phillip Futures Pte. in Singapore, said Aug. 5.

“There’s a lot of ripple effects beyond the very obvious,” Unnikrishnan said in Singapore, referring to the impact of lower shipments on the global supply and demand balance. Importers may rush to stockpile the grain if they believe prices will keep rising, she said.

Higher prices may also encourage farmers to boost planting, pushing prices lower in the first quarter of next year, she said.

‘Production Response’

“We’re going to see a production response and we’re going to see export demand being met,” Unnikrishnan said.

The U.S., the world’s largest wheat exporter, was forecast to expand its harvest by 2.2 percent to 61.6 million metric tons in the season that began June 1, while stockpiles by May 31 will fall to 25.9 million tons from 26.5 million tons a year earlier, the Department of Agriculture said yesterday.

Global wheat production will drop to a three-year low of 645.7 million tons in the 2010-2011 season, compared with last month’s estimate of 661 million tons, the USDA said. Global inventory, which was forecast to drop to a two-year low of 174.76 million tons, will be 49.9 million tons larger than the level in the 2007-2008 season when prices surged to a record, data showed.

“If you’re looking at global production, excluding the former Soviet Union countries, those numbers are looking very, very healthy,” Unnikrishnan said. Those supplies will prevent “big sustained rallies” in prices, she said.

While raw sugar will be the worst performer in the second half, it’s unlikely prices will fall back to the 13-cents level seen in May “because despite the pick-up in production, global inventories are still at very thin levels and import demand is still fairly strong,” Unnikrishnan said.

Raw sugar for October delivery jumped 3.9 percent to 18.97 cents a pound on ICE Futures U.S. in New York yesterday.

To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net.

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net;

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