World wheat bounty at risk as dry spell spooks market
A damaging global dry spell is wilting wheat crops in Kansas, threatening exports from Russia and slowing sowing in Australia, serving a timely reminder to hedge funds that a new era of surplus grain is far from assured.
In their biggest surge since 1996, Chicago wheat prices jumped by more than 17 percent last week and reached a nearly 9-month high of more than $7 a bushel on Monday, a rally stoked by short-covering among big speculators -- a group that had amassed a near-record short position betting on falling prices.
By Tuesday, six days of buying subsided as analysts said the immediate weather-induced panic yielded to a more considered view: conditions are not as dire - at least not yet - as they were in 2010, when world trade in wheat was sharply curtailed as growing nation's held tight to limited supplies.
Chicago wheat prices tumbled 2.6 percent to $6.85-1/2 per bushel, snapping a six-session rally following forecasts for rain in Russia's drought-stricken breadbasket regions and on pressure from a strengthening dollar.
New forecasts for rain in Russia and Australia should help limit damage; global stockpiles are more than 50 percent than in 2007; and rising demand for wheat as livestock feed is curtailed by higher prices, easing demand on tightened supplies.
And yet new risks are rising: Australia's Bureau of Meteorology warned of a possible return of the El Nino weather pattern later this year, threatening to sap rainfall for a country that exports nearly one-sixth of global trade.
"In light of what happened in 2010... everybody is more sensitive," said Rich Feltes, vice president for research with futures merchant R.J. O'Brien.
Global stockpiles of wheat are forecast to dip next summer to the equivalent of 100 days worth of demand, according to the USDA's forecast earlier this month, the lowest since 2009, when inventories were recovering from several years of declines.
But global supply would have to drop by more than 50 million metric tons (55.1 million tons) -- equivalent to almost double U.S. exports -- in order to reduce inventories to the ultra-low stocks-to-use ratio of 72.5 days, the level that in 2007 triggered a price spike and global alarm over global inflation and food security.
How dire the situation becomes this year will largely depend on what happens with weather in the former Soviet Union (FSU) countries, said Feltes.
"I don't think it's down to the bread counter yet. But if conditions worse in the FSU it will be more of a significant issue."