The deepest slump in Australian wheat shipments in six years will exacerbate the biggest contraction in global exports in a generation after droughts withered crops around the world.
Sales by Australia, last year’s second-largest supplier, will tumble 31 percent to 17 million metric tons in the 12 months through Sept. 30, based on the median of seven analyst estimates compiled by Bloomberg. The prediction is 1 million tons lower than forecast by the U.S. Department of Agriculture. The most widely held option on the Chicago Board of Trade gives holders the right to buy the grain for delivery in December at $10 a bushel, or 16 percent more than now, bourse data show.
A lack of rain is also curbing corn and soybean harvests, driving futures to records and contributing to the highest global food costs in six months, United Nations data show. Countries will spend more than $1 trillion on food imports for a third year in 2012, the UN estimates. Wheat surged 32 percent this year, the most since 2007, after dry weather in the U.S., Europe and Australia. The USDA expects worldwide exports to drop 16 percent, the biggest decline since 1986.
“The rain didn’t come until late,” said Maitland Davey, a 69-year-old who farms 3,700 acres northeast of Perth, the capital of Australia’s biggest exporting state. “I hate ripping that ground up dry, dust just flying everywhere,” he said, predicting a 30 percent decline in his harvest this year.
Wheat traded at $8.645 on the Chicago Board of Trade today and averaged about $7.41 this year. Futures may climb 7.6 percent to $9.30 by the end of 2012, the median of 16 trader and analyst estimates compiled by Bloomberg shows. The Standard & Poor’s GSCI Agriculture index of eight commodities rose 12 percent this year, and the MSCI All-Country World Index of equities gained 9.9 percent. Treasuries returned 1.9 percent, a Bank of America Corp. index shows.
Global wheat production will drop 6.1 percent to 653.1 million tons this marketing year, steeper than the 2.5 percent decline in demand to 678.2 million tons, the USDA estimates. That will reduce stockpiles by 13 percent to 173 million tons, the smallest since 2009, the agency says. The London-based International Grains Council said Oct. 25 that combined grain stockpiles in the largest exporters will drop to a 17-year low.
The USDA’s estimates may still be too optimistic. While the Washington-based agency expects Australian output to be 23 million tons, the median in a Bloomberg survey of six analysts and traders was 20.8 million tons, implying a decline of 30 percent on a year earlier and the lowest since 2008.
Surging prices may curb consumption more than the USDA anticipates. Demand contracted 3.5 percent in 2004 after futures advanced for four consecutive years. Livestock farmers, who use wheat in feed, are accelerating slaughter rates because the jump in grain prices eroded margins. U.S. pork inventories on Sept. 30 were the highest for the period since the USDA started compiling the data in 1915.
Farmers historically have responded to rallies by planting more crops the following season. Wheat production expanded almost 12 percent in 2009 after prices reached a record $13.495 the previous year, USDA data show. Sowing in the U.S., the world’s biggest exporter, is set to increase 1.9 percent to 56.81 million acres, Memphis, Tennessee-based Informa Economics Inc. said in a report Oct. 19.
Global food prices are still 9.3 percent below the record set in February 2011, UN data show. Prices have been curbed in part by a glut of sugar and by abundant rice supplies, a staple for half the world. Stockpiles of the grain will rise 6 percent to a record, the UN estimates. That’s preventing another global food crisis and keeping wheat below $10, said Wayne Gordon, an agricultural strategist at UBS AG in New York.
While rising corn and wheat prices “will affect our pet care business,” overall increases in Nestle SA (NESN)’s agricultural raw-material costs should be in the “low to mid-single digit” this year, Chief Financial Officer Wan Ling Martello told investors at a Shanghai conference Oct. 18. The world’s biggest food company made 12 percent of its sales in pet care last year.
Hedge funds and other large speculators are holding a net- long position, or bets on higher prices of 55,269 futures and options, U.S. Commodity Futures Trading Commission data show. That’s more than eight times the average over the past five years. Futures traders are also anticipating higher prices, with grain for delivery in May now trading at a 2.5 percent premium to the December contract, from a discount of 5.8 percent in July.
That reflects mounting concern about crops in Australia, where the harvest began this month, and in Argentina, where farmers usually start cutting grain next month. The South American nation, the sixth-biggest exporter, will produce 16 percent less this season, the government said Oct. 18.
Declining supply in Australia is driving domestic prices higher, with a 47 percent gain this year to A$330 ($343) a ton in Western Australia. That makes it one of the world’s most expensive varieties, according to Luke Mathews, a commodity strategist at Commonwealth Bank of Australia (CBA) in Sydney.
Shipments from the former Soviet Union may drop 48 percent this season as drought damaged crops, the USDA predicts. Exports from Russia may “practically halt” in the second half of the marketing year, the USDA’s Economic Research Service said in its monthly outlook. Ukraine will soon exhaust its exportable supplies, making a formal ban “irrelevant,” said Mathews. Both nations limited sales in 2010 after droughts.
The effects of the worst U.S. drought since 1956 are still being felt in the winter wheat crop, which is usually planted in September and October. About 49 percent of plants had emerged by Oct. 21, compared with a five-year average of 56 percent, the government estimates. That may make the shoots vulnerable to damage going into winter dormancy, said Mathews.
Inventories of wheat in North America, the 27-nation European Union, the Black Sea region, Australia and Argentina will drop to 36 percent of global trade, from 53 percent a year earlier, according to Paul Deane, an agricultural economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Melbourne.
“The Australian situation could exacerbate the tightness,” said Deane. “Half way through the marketing year both East Coast and South Australia could have pretty much exhausted what they had available to export.”
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