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Looming glut may bring an end to wheat rally

Rabobank ranks wheat as the most bearish crop for 2019, forecasting that prices will peak in the first quarter.


WHILE most crop markets had a lacklustre 2018, wheat enjoyed a rally. But those gains look like they may be fleeting.

Wheat could become a victim of its own success. As its price proves to be more attractive than competing crops, there are signs that farmers across the globe are sowing more acres for the first time in four years. The increased plantings are expected to swell global supplies at a time when demand remains tepid.

Rabobank International ranked wheat as the most bearish crop for the year ahead, forecasting that prices will peak in the first quarter of 2019. Hedge funds have been betting on price declines for the grain since mid-September.

There will be "too much supply of wheat", Brian Hoops, a senior market analyst at Midwest Market Solutions in Springfield, Missouri, said. To see prices rise, there would have to be "a crop problem somewhere in the world," he said.

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Wheat had a standout 2018. Prices are heading for a 23 per cent gain, the top performer among the 11 agricultural commodities in the Bloomberg Commodity Index. World stockpiles are shrinking after years of gluts, and the crop became a bright spot for growers as trade uncertainty between the US and China weighed on soyabeans and corn pared its gains.

A lot of the rally was sparked by drought across Europe and the Black Sea region, which bolstered worries over exports. Russia, the world's top seller, collected a smaller crop for the first time in six seasons. The weather concerns helped push prices to a three-year high in August.

The price surge is seen spurring farmers to plant 0.7 per cent more wheat in the 2019-2020 season, including in Russia and the European Union, the International Grains Council said in a November report. US farmers are expected to boost acres by at least 2.5 million, and the outlook is "bearish" as another year of weather-related supply disruptions isn't expected, according to a Nov 27 report from Societe Generale.

Even if availability in the Black Sea tightens and buyers turn to Europe and the US, global supplies will be replenished as Argentina harvests its massive crop early in 2019, said Arlan Suderman, chief commodities economist at INTL FCStone in Kansas City. As production rebounds in Australia, Europe and the Black Sea later in the year, it will once again be "tough" for US wheat exports to find a home, he said. This season, American export commitments are trailing last year's pace by 11 per cent, government data show.

Amid the sluggish demand, US stockpiles are expected to reach 965 million bushels, according to the average analyst estimate in a Bloomberg survey. That's higher than the 949 million the government predicted last month.

There's always the chance that poor weather could disrupt the hefty supply outlook. Parts of Europe grappled with a dry spell this autumn, limiting emergence and early crop development. Winter wheat growers in Kansas faced the opposite problem: one of the wettest Octobers on record delayed fieldwork.

Still, further weather challenges would be needed for wheat to sustain its gains.

"If there's a major production problem in the Black Sea or Europe or both, the world will come and draw down US supply," Mr Suderman said. "If not, we're sitting in a stagnant position." BLOOMBERG

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