Glencore Sees Unprecedented Conditions in the Grain Markets

Grains and oilseeds are facing unprecedented conditions as drought slashes U.S. crops, according to Glencore International Plc, the commodities trader of everything from copper to zinc and coal.

The commodities may be “quite a bit tighter” than in 2008, said Chris Mahoney, director for agricultural products at Zug, Switzerland-based Glencore. Wheat futures rose to a record $13.495 in February that year, the middle of a three-year period when the U.S. State Department estimates more than 60 food riots occurred. While wheat is still 33 percent below its all-time high, soybeans and corn rose to records in Chicago this month.

“It is an unprecedented situation, which will make the second half of the year rather interesting,” Mahoney said on a conference call today. “A company like ours will be required to think out of the box a bit.”

Oilseeds and grains are the best-performing commodities this year among 80 tracked by Bloomberg. Soybeans jumped 42 percent in 2012, the biggest increase on the Standard & Poor’s GSCI Spot Index, wheat rallied 39 percent and corn advanced 28 percent. Soybeans for November delivery rose 2.4 percent to $17.2425 a bushel on the Chicago Board of Trade by 3:12 p.m. London time, after touching $17.25, an all-time high for the most-active contract.

Corn Production

Corn production in the U.S. may be 260 million to 265 million metric tons because of the country’s worst drought in half a century, Mahoney said. The U.S. Department of Agriculture estimates the corn crop at 273.8 million tons and exports at 33 million tons. It’s “debatable” whether U.S. exports will meet the USDA target, Mahoney said.

Corn for December delivery rose 0.6 percent to $8.285 a bushel. The grain rose to a record $8.49 a bushel on Aug. 10. Wheat futures gained 0.6 percent to $9.08 a bushel in Chicago.

A ban on Russian grain exports is “not very likely for the moment” and authorities may review plans if overseas deliveries accelerate enough to use up exportable supplies, he said. Glencore has a hedging strategy in place and there will be no negative effect on earnings if Russia starts restrictions, Mahoney said.

“If they start to eat through their exportable surplus and they get most of the way through their exportable surplus by November or December, they could possibly have to rethink” plans for exports, Mahoney said. “People can see that coming.”

Russia’s wheat output may fall to 39 million to 41 million tons this year because of a drought, Moscow-based researcher SovEcon said yesterday. That would be below 41.5 million tons in 2010, when the worst drought in at least half a century curbed supplies and the government banned overseas sales for 10 months.

“The environment is a good one: high prices, a lot of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities,” Mahoney said. “It should also be good for Glencore.”

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