Traders Eye Grain Prices Rebound as Supply Set to Tighten

(Businessweek) – Grain prices that tumbled in recent weeks may rebound as demand stays robust while global stockpiles tighten after drought hurt crops from the U.S. to Russia.

Corn on the Chicago Board of Trade, the global benchmark, has slipped 13 percent since reaching a record $8.49 a bushel on Aug. 10, and wheat traded in Paris is down 4.8 percent from a 14-month high in July. While farmers are harvesting crops across the Northern Hemisphere, temporarily inflating supplies, world corn and soybean stockpiles as a percentage of consumption may drop to a 37-year low after dry weather in the U.S., South America and Europe, U.S. Department of Agriculture data show.

Corn may rally to $10 before this time next year because cattle and hog producers haven’t culled herds even as feed costs rose, Hussein Allidina, head of commodities research at Morgan Stanley, said Oct. 3 in an interview at Bloomberg News offices in London. Wheat prices also will be supported as livestock farmers substitute more of the grain in feed for high-cost corn, he said. Barclays Plc analyst Sudakshina Unnikrishnan expects CBOT soybean prices to rally to $18 a bushel, above the all-time high of $17.89 set Sept. 4.

“It’s a time to keep your nerve and wait for the markets to rebound, because they probably will,” said David Sheppard, managing director at Gainsborough, England-based grain exporter Gleadell Agriculture Ltd. “We’re in the calm before the storm with world grain markets. Russia and Ukraine are running out of exportable surpluses. France is selling quite aggressively into recent tenders, and if it carries on at the same rate they’ll probably be overselling.”

Best Performers

Corn may rise as high as $8.75 a bushel before next year’s Northern Hemisphere harvest, according to a Bloomberg News survey of as many as eight traders and analysts at the 52nd European Commodities Exchange in Edinburgh last week. Wheat may return to this year’s high near $9.50 a bushel and soybeans may reach $18, the survey showed.

Crops have been the best performing commodities this year on the Standard & Poor’s GSCI Index of 24 raw materials, even after recent price declines. Wheat traded in Chicago, the biggest gainer, has surged 31 percent, and in July touched $9.4725 a bushel, the highest price since August 2008. The MSCI All-Country World Index of equities is up 12 percent this year.

Russian Harvest

Russia, last season’s third-largest wheat exporter, may harvest as little as 40 million tons this year, the Agriculture Ministry said Sept. 6. That’s less than the harvest of 41.5 million tons in 2010, when the country’s worst drought in a half century spurred a 10-month ban on exports. Economy Minister Andrei Belousov said Sept. 21 that new export curbs can’t be ruled out amid dry weather this year, while Deputy Prime Minister Arkady Dvorkovich has said there’s no need to restrict shipments.

Even if Russia’s government doesn’t officially limit exports, the country is unlikely to ship much grain after the end of this year because prices are climbing, said Roger Baker, a Geneva, Switzerland-based merchant manager with CHS Inc., the largest U.S. cooperative, which markets 2 billion bushels of grain and oilseeds a year. Business will initially shift to European exporters, with U.S. wheat becoming more competitive in the first quarter, he said.

In Russia, “the market is going to lock the door,” Baker said in an interview in Edinburgh. “Prices have gone to where it’s allowed the market to do its job.”

Ukraine Supplies

Ukraine’s supplies are also dwindling. The country may curb wheat exports from mid-October as sales approach the 3.2 million-ton mark, Sergey Feofilov, director of Kiev-based researcher UkrAgroConsult, said in Edinburgh. Ukraine exported 2.6 million tons of wheat so far, the Ukrainian Agrarian Confederation said Oct. 2. Ukraine’s wheat exports will fall to 4 million tons this season from 5.44 million, the USDA estimates.

Egypt, the world’s largest wheat importer, has purchased supplies from France in at least four tenders in the past month, after favoring shipments from the Black Sea region for much of the season. In a tender on Oct. 3, Egypt also bought 60,000 tons from Argentina.

European grain stockpiles, including wheat, corn and barley, may total 26.8 million tons at the end of the 2012-13 season, down 12 percent from a year earlier, according to the London-based International Grains Council.

Livestock Supplies

Corn has the highest potential for gains, with the market getting tight in the second quarter, while wheat prices will likely only follow moves in corn, CHS’s Baker said. Wheat may advance if the crop in Australia, the second-biggest exporter, disappoints, coming in at 19 million to 20 million tons, he said. Australia cut its output estimate to 22.5 million tons in 2012-13 from a record 29.5 million tons a year earlier, the Australian Bureau of Agricultural and Resource Economics and Sciences said Sept. 11.

While grain costs climbed, livestock producers haven’t yet made large cuts in output, Morgan Stanley’s Allidina said. The hog herd in the U.S., the world’s biggest pork shipper, was 67.5 million head on Sept. 1, 0.4 percent larger than a year earlier, the USDA said Sept. 28. Feedlot inventories were 10.637 million cattle Sept. 1, only 0.6 percent smaller than a year earlier. Cattle herds globally may shrink by about 0.3 percent this year, while hog supplies increase 2.6 percent, the USDA estimates.

U.S. corn production may drop to 10.727 billion bushels, the smallest in six years, while soybean output may be 2.634 billion bushels, a nine-year low, the USDA said Sept. 12. The agency will update its projections on Oct. 11. Declining output may send world stockpiles of both crops to 177 million tons by the end of the marketing year, or about 16 percent of demand, the tightest since the 1975-76 season, USDA data show.

“Inventories are the tightest they’ve been in my lifetime, especially when adjusted for demand, and there’s no spare capacity,” Allidina said. “We can’t afford anything below trend line yields in Argentina, Brazil and the U.S. because we’re sitting on nothing.”

To contact the reporter on this story: Whitney McFerron in London at  wmcferron1@bloomberg.net Maria Kolesnikova in London at  mkolesnikova@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at  ccarpenter2@bloomberg.net