Wheat prices expected to rebound from drought

Undoubtedly, 2012 was the year of the drought. We’re talking everywhere from South America in early 2012 through Eastern Europe

Brennan Taylor, FarmLead Breakfast Brief

Undoubtedly, 2012 was the year of the drought. We’re talking everywhere from South America in early 2012 through Eastern Europe, Australia, and the US being hit by some hot, dry weather. Because of those droughts we’ve seen some prices farmers across the Canadian Prairies have been able to benefit from.

That being said, 2013 is a new year. Recent rainy/snowy weather in the US Midwest and Plains have many speculators more optimistic about a winter wheat crop that went into dormancy in December in its worst condition ever (aka since records have been kept). Ultimately, the wheat complex, in general, has seen a decline to near pre-drought 2012 levels.

Adding to this “return to the mean” is the fact a drought one year is not usually followed by a drought the next year (As you’re reading this you’re probably searching your brain for a specific set of years to tell me I’m wrong). Ultimately though, you have to go off the averages. That’s what insurance does; that what investors do; that’s what even government does. All things considered (yet weather pending as usual), the aforementioned regions affected by dry weather are likely to return to normal, if not higher production. More specifically, more wheat is expected to be planted in Brazil, Egypt, France and Germany, while return to more normal output is expected in the US, Australia, Russia and Ukraine. Apparently, everyone’s chasing high prices.

World wheat demand is expected to increase at a relatively equal pace, as pointed out by the International Grains Council’s most recent forecast. Areas of the world that will continue to affect the wheat marketplace are India and China. India has recently begun to sell off its surplus wheat stocks (three years of more than 90 million tonnes will do that) through private exporters into Southeast Asia and the Middle East (most feed though). Meanwhile, in China, despite data reporting questions, the country is becoming better at how they raise a crop. Increases in yield have accounted for two-thirds of the production increase in the last decade, while a 10-per-cent increase in planted land has accounted for the other one-third.

A large amount of the production in China has been attributed to the increase in corn acres, a higher yielding grain. With an expanding commercialized livestock industry as a result of a growing middle class (with an appetite), the demand for feed grains is growing significantly in the Asian supernation. Specifically, by 2022/23, the USDA says China will import almost 20 million tonnes of corn annually despite producing more than 200 million tonnes themselves. With China lending $3 billion US to the Ukraine to upgrade their agriculture infrastructure more corn can be exported back to China.

In North America, the corn industry is synonymous with ethanol and corn syrup. A government- subsidized market is definitely a large factor in the USDA estimate of 96.5 million corn acres to be planted in the US this year, the most since 1936. With production forecast to come in over 364.5 million tonnes, a recent Bloomberg survey of 17 analysts expects the price to decline to $5.24 per bushel by the end of 2013. Similarly, an estimated soybean planted crop of 77.5 million (a record) will help to accommodate the rising emerging market demand for oilseed, but ultimately push the price down to $12.12 a bushel by year’s end.

At the end of the day, production should be higher across the board this year and prices will most certainly reflect this in the long-term.

Brennan Turner is originally from Foam Lake, Sask. where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before startingFarmLead.com, a risk-free, transparent online grain marketplace. His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (b.turner@farmlead.com) or phone (1-855-332-7653).