Wheat Glut Eases Risks From Ukraine Fight to U.S. Drought

The world’s farmers are growing more wheat than ever, signaling to Goldman Sachs Group Inc. and Morgan Stanley that the biggest price rally to start the year since at least 1960 will soon end.

While drought erodes yields in the U.S. and escalating violence threatens supplies from Ukraine and Russia, global stockpiles on May 31 will be 5.8 percent larger than a year earlier, the first gain since 2010, a Bloomberg survey of 15 analysts showed. Output will then rise to a record, even with smaller U.S. and Black Sea crops, says Informa Economics Inc.

Farmers in the U.S., the top exporter, account for less of the world wheat trade after a decade of output gains in other countries, government data show. Canada, the No. 2 shipper, will see inventories double to a two-decade high after output surged 38 percent in 2013, and bigger crops are forecast this year from Australia to Europe to Argentina. Morgan Stanley said this week that ample supplies may mean price gains will stall, while Goldman in April forecast a drop of 24 percent by mid-October.

“We’re in a market that is being driven by fear at the present, and prices have been diverging away from fundamentals,” Christopher Gadd, a commodities analyst at Macquarie Group Ltd., said in a May 2 telephone interview from London. “We are going to see a big harvest in the Northern Hemisphere, despite the losses in the U.S.”

Surging Prices

Wheat futures are up 21 percent this year on the Chicago Board of Trade to $7.3525 a bushel today. The Standard & Poor’s GSCI Spot Index of 24 commodities advanced 2.7 percent since the end of December, while the MSCI All-Country World Index of Equities rose 1.4 percent. A Bloomberg Index of Treasuries gained 2.7 percent.

In the 12-months that start June 1, wheat probably will drop to an average of $5.50, as livestock producers use more corn in feed rations and inventories remain ample in Europe and the Black Sea region, Morgan Stanley said in a May 5 report. “Global inventories remain comfortable,” Goldman analysts led by Jeffrey Currie said in an April 13 report, which forecast prices falling to $5.60 in six months.

Global stockpiles on May 31 probably will rise to 186.8 million metric tons, the Bloomberg survey showed. That’s equal to 26.9 percent of estimated use, up from 21.1 percent in 2008, when prices reached a record $13.495. Production in 2014-2015 will reach an all-time high for a second straight year to 713.1 million tons, including records in India and China, the biggest grower, Memphis, Tennessee-based researcher Informa told clients in a May 2 report. Supply will expand even with smaller crops in the U.S., Russia and Ukraine, which will account for 37 percent of world exports in the year ending May 31.

Record Output

Grain production has never been bigger. Global supplies of wheat, rice and coarse grains including corn and barley rose 8.3 percent to 2.452 billion tons in the 12 months ending May 31, the USDA predicts. Outside the U.S., grain output will total 295.4 kilograms per person in the world, the most ever, and up 18 percent from a decade ago, agency data show.

“It will be awful hard to sustain rallies with global per-capita grain supplies at a record,” said Michael Swanson, a senior agricultural economist for Wells Fargo & Co. in Minneapolis.

The U.S. Department of Agriculture will update its production and inventory forecasts tomorrow at noon in Washington.

Crop Risk

There’s still a risk of supply disruptions. U.S. farmers probably will harvest the smallest winter-wheat crop since 2006 after freezes damaged yields and drought conditions persisted for the fourth straight year in the Great Plains, according to a Bloomberg survey of 20 analysts and traders.

Total domestic wheat output may drop 2.9 percent to 2.069 billion bushels, the least since 2011, while reserves before the 2015 harvest shrink 2.9 percent from a year earlier to 568 million bushels, the smallest since 2008, the survey showed.

Supplies are shrinking from “comfortable buffer stocks to snug instead,” Dan Manternach, senior wheat analyst for Doane Advisory Services Co. in St. Louis, said in an e-mail. “With the ending-stocks outlook now snug, it will keep a weather premium in the market. The market will be extraordinarily sensitive to any crop problems.”

Escalating tensions between Ukraine and Russia sent wheat prices to a 14-month high of $7.44 on May 6. Russia is the world’s fifth-largest exporting country, followed by Ukraine. Violence spread to the Black Sea port city of Odessa, where dozens were killed on May 2 after Russian sympathizers seeking to escape clashes took refuge in a building later engulfed by fire.

Both countries supply Egypt, the world’s biggest importer, and have expanded market share as population growth, rising incomes and government policies boost wheat demand to Middle East and Africa, the USDA said April 9.

No Disruptions

So far, there has been no evidence that exports are being disrupted from the Black Sea region, where crops are still two months from being harvested. Russia already has surpassed its plans to export 22 million tons of grain this agricultural year ending June 30, capitalizing on the devaluation of its currency and unrest in Ukraine, market researcher SovEcon said May 6.

“Unlike previous recent years, where a decline in production triggered huge price rises because inventories were low, this time around, production goes down but inventories are pretty healthy,” said Abdolreza Abbassian, a senior economist with United Nation’s Food and Agriculture Organization in Rome. The recent rally probably is temporary, he said. “We do not believe the situation is getting any tighter.”