Dust Bowl Wilting U.S. Wheat as Funds Turn Bearish

The worst U.S. drought since the 1930s Dust Bowl is damaging wheat crops across the world’s biggest supplier, at a time when hedge funds are the most bearish on prices in seven months.

About 61 percent of the country is mired in a dry spell that the government says will last at least until March in states growing the most winter wheat. With dormant crops already in the worst condition since records began in 1985 and global inventories headed for a third annual drop, Chicago futures may rise as much as 25 percent to $9.50 a bushel this year, the median of 32 analyst estimates compiled by Bloomberg shows.

That raises the prospect of prices reversing their 20 percent drop since a July peak, a retreat that spurred hedge funds to start betting on more declines in December. The prolonged drought is increasing concern that supplies will tighten because there is also dry weather in Argentina and Australia. Heat waves in the Black Sea last year curbed cargoes until the next harvest and a lack of rain is slowing barge traffic on the Mississippi, which handles about 60 percent of U.S. grain exports.

“We don’t see any fundamental reason why the wheat market should be going down,” said Tom Neher, a vice president at AgStar Financial Services in Rochester, Minnesota, who helps manage the company’s grain investments valued at about $2.1 billion. “We’re looking at Argentina and the Black Sea area and Australia with smaller-than-normal crops. In the U.S., the crop isn’t ideal going into the winter stretch.”

Top Gains

Wheat advanced 19 percent to $7.78 in 2012 on the Chicago Board of Trade, having risen as high as $9.4725 in July. It was the biggest gain in the Standard & Poor’s GSCI Spot gauge of 24 commodities, which rose 0.3 percent. The MSCI All-Country World Index of equities jumped 13 percent, and the dollar fell 0.5 percent against a basket of six trading partners. Treasuries returned 2.3 percent, a Bank of America Corp. index shows.

About 33 percent of winter-wheat fields were in good or excellent condition by Nov. 25, from 52 percent a year earlier, U.S. Department of Agriculture data show. Winter wheat, which goes dormant during the winter and resumes growth in March and April, is the most common variety grown, accounting for about 70 percent of U.S. production.

Drought is affecting all of Kansas, the biggest winter-wheat grower, with conditions in the western counties that can cause widespread crop losses, according to the U.S. Drought Monitor. Rainfall was as little as 10 percent of normal in the past 60 days in parts of Kansas, Oklahoma and Texas, National Weather Service data show.

Lost Crop

Kenneth Failes, who farms 850 acres near Cherokee, Oklahoma, said as much as 40 percent of his wheat didn’t emerge from the dry soil before the start of freezing weather and is lost. Growers in the southern Great Plains may abandon as much as 25 percent of their hard, red winter-wheat crop, the most since 2003, according to Mark Hodges, the executive director of Plains Grains Inc., a marketing company in Stillwater, Oklahoma.

Global production will drop 5.9 percent to 655.11 million metric tons in the year ending May 31, the USDA estimates. Inventories are declining for a third year and will be at the lowest level relative to consumption since 2008, when wheat prices surged to a record $13.495 in Chicago.

Rain Fix

Rain in the next 60 to 90 days would revive some crops and prevent further damage, said Lane Broadbent, a vice president at KIS Futures Inc., a commodities brokerage in Oklahoma City.

“Wheat is such a hardy plant, it can look pretty bad and turn into a crop,” said Broadbent, who also co-owns a 400-acre wheat farm. “It’s not as catastrophic as if it were the middle of February or March.”

That may be the view of some of the hedge funds and other large speculators who expect prices to keep dropping. They held a net-short position of 11,899 futures and options contracts by Dec. 24, U.S. Commodity Futures Trading Commission data show. That’s from a record net-long position of 80,827 on Aug. 7.

Chicago futures fell for a third consecutive month in December, dropping 9.9 percent, before trading at $7.575 today. Prices for hard, red-winter wheat on the Kansas City Board of Trade slumped 9 percent last month to $8.31 a bushel. The USDA raised its estimate for global reserves by 1.6 percent from a month earlier on Dec. 11, after raising its production estimate and reducing the demand forecast.

The Dust Bowl that ravaged Great Plains states in 1934, 1936 and 1939 was the result of farming practices that left soil unprotected from sustained drought. High winds carried loose dirt into the sky, creating storms referred to as “black blizzards,” according to the National Climatic Data Center.

Million Bushels

U.S. wheat production plunged 30 percent in 1933 and dropped another 5 percent the following season to a 38-year low of 526 million bushels, according to USDA data. Farmers are expected to collect 2.27 billion bushels in the current season.

The USDA probably is underestimating the drought damage to crops in Argentina and Australia, Goldman Sachs Group Inc. analysts led by New York-based Jeffrey Currie wrote in a report Dec. 5. Global inventories will be smaller than forecast, partly because wheat remains an affordable alternative to corn for feeding livestock, they wrote.

Russian production will fall 32 percent to 38 million tons and Australian output will drop 26 percent to 22 million tons, according to the USDA. Argentina has said it will curb exports until the end of January to protect domestic supply.

Tighter Supply

Investors may not realize the potential problems with wheat supply, Abdolreza Abbassian, an economist at the United Nations’ Food & Agriculture Organization in Rome, said in an interview Dec. 6. He cited concern over growing conditions in Russia, the U.S. and Europe, and grain harvests in Argentina, where the worst dry spell in 85 years, combined with unusually wet weather in coastal areas, damaged wheat crops and delayed corn planting.

While global food prices tracked by the UN were 2.5 percent lower than a year earlier in November, the group’s cereals index was 12 percent higher. Cattle futures rose for a fourth year in 2012 and hog prices for a fifth year as feed costs increased.

Third-quarter profit at Mexico City-based Grupo Bimbo SAB, the world’s largest breadmaker, fell 82 percent to 369.5 million pesos ($28.4 million), partly because of costlier wheat. The company faces “pressure” on raw materials after the “rapid rise” in prices, Chief Executive Officer Daniel Servitje Montull told analysts on a conference call in October. Futures averaged the second-highest on record in 2012.

With drought also damaging U.S. corn and soybeans, crop-insurance claims for 2012 may more than double to a record $28 billion, according to Doane Advisory Services Co., a farm and food-company researcher in St. Louis. With so much of the winter crop already lost, claims may not subside any time soon.

Farmers Hurt

About 30 percent of the winter wheat in central Kansas has already failed, with further damage likely unless there is rain, said Rosie Meier, a grain merchandiser at the Great Bend Co-op in Great Bend, Kansas.

“There’s a lot of wheat that did not come up,” she said. “Farmers are going to be hurt. Right now, they’re doing OK because their insurance checks and the higher grain prices kept them going. If they don’t get production next year, they’ll have to rely on just the insurance.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE