Kansas farmers are preparing to plant winter wheat into the driest soil since 1991 as three seasons of drought causes Dust Bowl conditions in the biggest growing state and global reserves fall to a four-year low.
About 97 percent of fields in the state had too little moisture as of Aug. 19, U.S. Department of Agriculture data show. Kansas is having its hottest year ever, leaving all 105 counties as federal disaster areas. The worst U.S. drought since 1956 spread to wheat-growing Great Plains states after damaging corn and soybean yields in the Midwest and driving prices for both crops to a record.
The International Grains Council cut its stockpile forecast for the third time in as many months Aug. 23, and the United Nations said in July that grain prices drove the biggest monthly gain in food costs since 2009. Wheat reached a four-year high in July, boosting costs for Panera Bread Co. and Grupo Bimbo SAB, and may jump another 8.5 percent to $9.80 a bushel in three months as droughts limit output from the U.S., Russia and Ukraine, according to Goldman Sachs Group Inc.
“We just have no subsoil moisture at all,” said David LeRoy, a 56-year-old who farms 3,000 acres about 10 miles west of Great Bend, Kansas, and plans to start sowing winter wheat next month for harvesting in June. “We’re going to have to have a wet winter to raise any wheat at all. When you have a small amount of rain, like we have, nothing wants to grow.”
Futures surged 38 percent this year to $9.03 a bushel on the Chicago Board of Trade, second only to the 46 percent advance in soybeans. Both overtook a 25 percent gain in corn among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index, which rose 3.4 percent. The MSCI All-Country World Index of equities added 7.1 percent, and Treasuries returned 2.1 percent, a Bank of America Corp. Index shows.
The lack of any significant rain in Kansas through July resulted in the driest three months for the state since at least 1890, according to the Western Regional Climate Center. Temperatures from January through July averaged 59.4 degrees Fahrenheit (15 degrees Celsius), a record for the period, said Mary Knapp, the state climatologist in Manhattan, Kansas.
Global wheat stockpiles will drop 10 percent before next year’s harvest to 177.2 million metric tons, the lowest since 2009, the USDA said Aug. 10. Russia’s harvest may fall 24 percent, Kazakhstan’s is seen tumbling 52 percent, Ukraine may reap 32 percent less, and Australian output is forecast to drop 12 percent, the USDA said. The last time supplies were that tight, Russia imposed export restrictions that lasted 10 months.
About 70 percent of the U.S. harvest comes from winter wheat planted in September and October. The rest is spring wheat sown in June. The outlook dimmed after fields dried up from Ohio to Texas to Montana and the government declared half of all counties disaster areas. The USDA, after predicting record corn harvests in June, said this month that output will plunge 13 percent this year after kernels withered.
“The really extreme drought has shifted westward,” said Dan Manternach, a wheat economist at Doane Advisory Services in St. Louis. “They’re doing some field work, but some have stopped field preparations because it’s too dry. That’s unusual because usually if it’s this dry, they say: ‘Let’s at least make a cloud of dust’.”
U.S. farmers may still plant winter wheat because most will be guaranteed $8.60 to $8.80 a bushel from insurance policies even if the crop fails, said Doug Etheridge, a senior vice president in futures and options at RBC Wealth Management in Charlotte, North Carolina. Before the drought sparked a rally, futures averaged about $7.16 this year through mid-June.
Surging prices may curb demand for U.S. grain and boost sales from Canada, the fourth-largest exporter, where production is rising for a second consecutive year. U.S. shipments overseas reached 5.69 million tons from June 1 to Aug. 16, 13 percent less than a year earlier, USDA data show. The government’s official forecast is for a 14 percent increase in sales in the year that began June 1.
World wheat supplies are “sufficient” to meet global demand even if Russia decides to limit exports, and prices may decline by the end of the year, Capital Economics Ltd. said in a report yesterday. In the year ended May 31, the top exporters were the U.S., Australia, Russia and Canada, USDA data show.
U.S. farmers may be depending on an emerging El Nino weather pattern to bring more water in the next several months. That may boost rainfall in parts of Texas, the second-largest winter-wheat grower, state climatologist John Nielsen-Gammon wrote in a report on Aug. 21. Winter wheat is planted from September through November, goes dormant when temperatures drop and resumes growing in April or May.
Plants may not survive that long without more rain, especially in Kansas. The southwest corner of the state has had three consecutive years of drought, leaving an increased risk of a return to the devastation of the Dust Bowl era in the late 1930s, according to Jim Shroyer, an agronomist at Kansas State University in Manhattan. Lack of crop production in the region means fewer plants and roots to keep the dirt in place.
“I’m worried about the dust starting to blow again,” Shroyer said. “I’ve heard people say that with our current farming techniques we’ll never have a Dust Bowl again. That’s a bold statement.”
No one is pointing to a return to the poverty of the 1930s. Along with crop insurance and emergency subsidies made available because of the drought, U.S. farmers have been transformed from subsistence growers to global suppliers. About 20 percent of the labor force worked in farming then, compared with less than 2 percent today, according to U.S. Census data.
Global stockpiles may drop to a five-year low, Goldman analysts led by New York-based Jeff Currie said in a report Aug. 7. If production in the former members of the Soviet Union falls too low, Russia and Ukraine may impose export restrictions as they did in 2010, they said.
Wheat rallied 47 percent that year, contributing to a jump in food costs that reached a record in 2011 and helped spark riots across the Middle East and North Africa. The IGC estimates Russia will harvest 41 million tons this year, less than the 41.5 million it reaped in 2010. Rabobank expects prices to reach $9.20 in the second quarter of 2013, still 32 percent below the record of $13.495 reached in February 2008.
Rising prices boosted the cost of flour for St. Louis-based Panera Bread during the second quarter and reduced margins, President and Co-Chief Executive Officer William W. Moreton said on a conference call with analysts July 25. A $1 gain in wheat boosts Panera’s annual costs by about $3 million, and the company expects to spend an extra $6 million on the commodity this year.
Grupo Bimbo SAB, the world’s largest bread maker, will have to buy more costly wheat should current conditions persist, and that may mean raising prices for its products, Mexico City-based CEO Daniel Servitje Montull said on a conference call July 26.
“We’ve planted wheat into dry conditions in the past, but I haven’t planted into conditions where we’ve had an extreme dry period for this long,” said Justin Knopf, a 34-year-old farmer near Salina, Kansas. “We’re planning on seeding as we normally do and hoping for moisture in the next several months.”