Wheat Damage Claims May Signal Worse Harvest Than Forecast

Wheat crops in the U.S. Great Plains are showing signs that production may plunge more than the government forecast last week as hot weather and a lack of rain erode plant quality and force farmers to harvest early.

As of May 15, U.S. winter-wheat was in the worst condition since 1996, with 44 percent of fields rated poor or very poor by the government. The National Weather Service estimates rainfall in the past two months was less than half of normal in much of Texas, Oklahoma and Kansas, where insurance adjuster David Reed said he’s had 300 farmer claims for drought damage in his area this season, already 10 times more than last year.

“I went out to look at fields, and it looked like the tips of the heads were burnt” after temperatures last week topped 100 degrees Fahrenheit (38 degrees Celsius), said Reed, an area claims supervisor in Stockton, Kansas, for Rural Community Insurance Services, a unit of Wells Fargo & Co. “It’s kind of scary. I would think that the abandonment numbers probably are going to be fairly high.”

After a Russian drought led to a drop in global output in 2010, the prospect of smaller crops in the U.S., the world’s largest exporter, has sent wheat futures up 63 percent in the past year. Goldman Sachs Group Inc. on May 11 raised its price forecast, citing “persistent adverse weather” in many growing areas. Dry spells in Europe and excessive rain in the northern U.S. and Canada also fueled prices, boosting costs for food makers including General Mills Inc. (GIS) and Panera Bread Co.

Declining Output

The U.S. Department of Agriculture forecast on May 11 that hard, red winter-wheat output will drop 25 percent to 762 million bushels, the smallest since 2006. Mark McMinimy, a Washington-based agribusiness analyst with MF Global Holdings Ltd., said the USDA will likely cut that estimate by 4.9 percent to 725 million because of the dry spell. Hard, red winter wheat, the most common U.S. variety, is grown primarily in the Plains and is used to make bread.

Further downgrades to Great Plains supplies would be “supportive” to futures, especially if planting delays are prolonged in North Dakota and Canada, McMinimy said. Wheat futures for July delivery jumped 3.7 percent today to close at $7.64 a bushel on the Chicago Board of Trade. Prices reached a two-year high of $9.1675 on Feb. 14.

‘Too Late’

“It’s getting to the point where, across a large section of the wheat belt, it’s too late for rain to do any good,” McMinimy said. “Crop conditions continue to decline. I don’t think it would be too surprising to see production figures decline again.”

Last week, Goldman Sachs raised its three-month wheat forecast to $8 from $7.75, while the six-month and 12-month forecasts were increased to $8.35 from $7.50.

Dry weather already is forcing farmers to harvest two weeks ahead of normal in Texas and Oklahoma, according to Stillwater, Oklahoma-based wheat marketer Plains Grains Inc.

Kansas, Texas and Oklahoma produced 608.4 million bushels of wheat last year, or 28 percent of the total U.S. supply, according to the USDA. Those states are the biggest growers of the hard, red winter variety. This year, the USDA expects production to drop 63 percent in Texas, 38 percent in Oklahoma and 27 percent in Kansas, compared with 2010.

About 8 percent of crops in Texas had been collected as of May 13, and harvest began last week in Oklahoma, said Mark Hodges, the executive director of Plains Grains, a nonprofit group that takes wheat samples from elevators to determine the quality of the U.S. crop.

‘Severe Stress’

The early harvest “is a very strong indicator that the crop was under severe stress,” Hodges said. “Since we’re two weeks ahead of normal, that tells you immediately that we’re going to have less-than-average yields.”

Kansas, the biggest winter-wheat grower, may produce 261.8 million bushels this year, the least since 1996, the USDA said. The Wheat Quality Council, a Pierre, South Dakota-based trade group, estimated Kansas production at 256.7 million, based on a survey of 55 analysts following a three-day tour of fields.

The USDA’s “wheat report is pretty backward looking at this point,” said Mike Zuzolo, the president of Global Commodity Analytics & Consulting in Lafayette, Indiana. “The USDA is going to have to square up some issues with the European wheat crop and the U.S. wheat crop. It doesn’t seem like, to me, that they factored in enough supply reductions.”

T-Storm Outlook

About 52 percent of the hard, red winter-wheat growing area from South Dakota to Texas received less than half of the normal amount of rainfall in the past 30 days, said Mike Tannura, the president of T-Storm Weather in Chicago. Areas of Nebraska and Kansas may get up to 1.5 inches (3.8 centimeters) of rain from storms beginning May 19, while southwest Kansas, Texas and Oklahoma will be “mostly dry over the next week,” he said.

“You can begin harvesting wheat at the end of May in the southern Plains, so even if you get an inch of rain now, it’s way too late,” Tannura said. “They needed it weeks or months ago.”

The USDA estimates that U.S. wheat exports in the year ended May 31 will be 45 percent higher than a year earlier. If reduced grain supplies send prices higher, demand from food processors and livestock feeders will likely slow, said Diana Klemme, a director at Grain Service Corp., a consulting company and brokerage in Atlanta.

“For hard wheat, we will not be able to have the same pace of consumption we had this year, because we would have zero left,” Klemme said. “Wheat feeding will have to dial back, because the wheat just isn’t there.”

To contact the reporter on this story: 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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