The worst US 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 62 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 heading for a third annual drop, Chicago futures contracts may rise as much as 25 percent to $9.50 (R80) a bushel this year, the median of 32 analyst estimates compiled by Bloomberg shows.
That would mean a reversal from their 20 percent drop since a July peak of $9.4725 on the Chicago Board of Trade. The retreat spurred hedge funds to start betting on more declines last month. There is also dry weather in Argentina and Australia, and heat waves in the Black Sea.
“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. “We’re looking at Argentina and the Black Sea area and Australia with smaller-than-normal crops. In the US, the crop isn’t ideal going into the winter stretch.”
Only 33 percent of winter-wheat fields were in good or excellent condition by November 25, compared with 52 percent a year earlier, US Department of Agriculture (USDA) data showed.
Winter wheat, which goes dormant during the winter and resumes growth in March and April, is the most common variety grown, accounting for 70 percent of US production.
Global production will drop 5.9 percent to 655.11 million tons in the year to 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 prices hit a record $13.495 a bushel in Chicago.
Rain in the next 60 to 90 days would revive some crops and prevent further damage, said Lane Broadbent, a vice-president at commodities brokerage KIS Futures.
“Wheat is such a hardy plant, it can look pretty bad and turn into a crop,” said Broadbent, who also co-owns a 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 December 24, US Commodity Futures Trading Commission data show. That compares with a record net long position of 80 827 contracts on August 7.
Chicago futures fell for a third month in December, falling 9.9 percent. They traded at $7.58 on Wednesday. Prices for hard, red winter wheat on the Kansas City Board of Trade slumped 9 percent last month to $8.31 a bushel.
In 1933 US wheat production plunged 30 percent and dropped another 5 percent the following season to a 38-year low.
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”. – Tony Dreibus from Bloomberg in Chicago