Wheat's Worst Plunge Since 1986 Isn't Steep Enough for Bears

Summer Wheat Harvest In Russia

Wheat grain pours into a truck from a combine harvester.

Photographer: Andrey Rudakov/Bloomberg
  • Hedge funds hold net-short position for seven straight weeks
  • Global inventories forecast at record before 2016 harvest

Hedge funds are so down on wheat that even the worst price plunge in 29 years isn’t leaving them satisfied.

Instead, a global glut has money managers ready for more losses and sticking with a net-bearish outlook for seven straight weeks. World inventories before the start of next year’s harvest are expected to climb to an all-time high as farmers reap bigger crops in the U.S., Russia and Ukraine.

Wheat futures tumbled 21 percent from the end of June through Friday, heading for the worst quarterly loss since 1986. American farmers are particularly struggling because they’re saddled not just with bigger stockpiles, but also a rising dollar. The stronger currency is making exports from the U.S., the world’s top shipper, more expensive for overseas buyers.

“You have a lot of producers around the world coming in with pretty solid crops,” said Sameer Samana, a St. Louis-based global quantitative strategist at Wells Fargo Investment Institute, which oversees $1.6 trillion. “You have France, the U.S., Russia, Ukraine and others all jockeying to sell their wheat. That will probably continue to put pressure on prices.”

The wheat net-short position, or bets on declines, totaled 39,382 futures and options in the week ended Sept. 15, according to U.S. Commodity Futures Trading Commission data released three days later. The seven weeks of bearish outlook is the longest streak since late June.

Futures dropped 16 percent this year to $4.945 a bushel in Chicago. The Bloomberg Commodity Index of 22 components fell 15 percent. The MSCI All-Country World Index of equities dropped 5.4 percent, and the Bloomberg Dollar Spot Index gained 6.8 percent.

World wheat inventories at the end this season will grow to 226.56 million metric tons, the U.S. Department of Agriculture said on Sept. 11. That’s up 7.2 percent from a year earlier, a third straight increase. The agency expects domestic stockpiles to jump 16 percent to a six-year high.

There’s not a lot of demand for all that grain. In the U.S., commitments for exports this season are trailing last year’s pace by about 13 percent, government data show. French shippers are also having a hard time attracting buyers, and there’s so much excess supply in the country that some silo operators are maxed out.

“Investors are perpetually short because it’s a market where you’ve got a crop coming out of just about every country in the world,” said John Stephenson, the chief executive officer of Stephenson & Co. Capital Management in Toronto, which oversees C$55 million ($41.6 million). “It’s so well-supplied globally that it’s never usually a problem getting your hands on wheat.”

The saving grace for bulls could come from crop-damaging weather. Dryness is building in parts of Kansas, the largest U.S. grower of winter varieties that are now being seeded. While the lack of moisture is a worry for farmers, a “big window” remains for sowing, said Helen Pound, a senior commodity specialist at Wedbush Securities in Minneapolis. Nine percent of the domestic winter crop was planted as of Sept. 13, matching the prior five-year average, USDA data show.

There are also risks to global plants. The Brazilian crop faced losses from frost this month, according to Somar Meteorologia. Winter-wheat in early stages in Ukraine may be stressed by hot, dry weather in the next week, Speedwell Weather forecasts. This year’s El Nino, which can bake parts of Asia and alter rainfall in South America, will peak around the end of the year as sea temperatures in the Pacific Ocean may exceed those seen in the record event almost two decades earlier, according to Australia’s Bureau of Meteorology.

“I don’t know what’s going to happen when the El Nino gears up later on,” Pound said. “Any farmer that has had dry weather, that’s going to worry him about planting his crop.” Still, with plentiful supplies around the globe, “it’s hard not to be bearish,” she said.

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