Heat Drives Wheat Prices

High temperatures in Europe and Asia cut harvest forecasts; U.S. farmers benefit

This year's heat is hitting wheat yields in growing areas such as Russia, Ukraine, France and Britain.

Global wheat prices have soared to multiyear highs as a heat wave sweeping across Europe and Asia slashes forecasts for this year's harvest. The price rise could potentially provide some relief to North American farmers, who have largely avoided such scorching weather, just as Chinese tariffs sap demand for other crops like soybeans.
 Chicago wheat futures hit three-year highs Thursday, while a key European benchmark topped a four-year high. The price of Paris-traded milling wheat has leapt 33% so far this year. That is already translating into more expensive animal feed in some regions and could eventually mean more expensive bread.
 Hot temperatures and drought stunt the growth of cereals. With this in mind, the U.S. Agriculture Department has forecast that global wheat stockpiles will fall for the first time since 2013.
 So far, most agricultural analysts say this wheat-stunting summer is an aberration. But the prospect of global warming has led some observers to predict an eventual shake-up in parts of the world.
 “Dry weather across the board has stifled yields,” said Tracey Allen, agricultural commodities strategist at JPMorgan Chase & Co. “We've certainly seen dry conditions in Europe compounded by earlier issues with the Black Sea crop drawing down inventories quite quickly.”
 She added that the U.S. is well-placed to increase its export share of the global market in 2018 and 2019.
 After years of oversupply, this year's heat is hitting wheat yields in growing areas such as Russia, Ukraine, France and Britain, while also affecting the crop in Australia, China and other parts of Asia.
 It is unusual for Europe to experience such a scorching summer. The unseasonable heat “has been going at least a couple of months, and it's been between 7 and 10 degrees [Fahrenheit] above normal over the last month,” said Donald Keeney, senior agricultural meteorologist at weather consultancy Radiant Solutions.
 In Southeast Asia, a wave of El Niño weather systems — characterized by hotter-than-normal waters in tropical Pacific Ocean regions and less precipitation in Southeast Asia and eastern Australia — has prompted warmer, drier weather in key growing regions in recent months.
 Wheat is harvested between June and September in Europe, and data has suggested shortfalls. The International Grains Council slashed its forecast for European Union wheat in 2018-2019 to just shy of 140 million metric tons, down from 148.3 million tons in March. “There is no end to the dire EU drought,” research firm AgResource Co. said in a recent note. “The bull story in world wheat is just unfolding.”
 Less wheat from other parts of the world is a boon for U.S. and Canadian exporters, who are expected to produce better crops this year. The ratio of global grain supply, both wheat and corn, relative to demand has never been lower, AgResource said.
 In coming days, Ryan Wagner will start harvesting his wheat in Day County, S.D. “It's a good spot to be in if you have a good crop and there's a shortage in another part of the world,” he said.
 The jump in wheat prices comes at a difficult time for U.S. farmers, after China slapped tariffs on American grain and oil-seed imports. While the prices of other commodities such as soybeans have fallen, wheat traders have been largely unaffected as buyers look to them to make up shortfalls elsewhere.
 It's the opposite for Western Europe's farmers, who had already suffered from low-cost competition from the Black Sea region. Grain levels have fallen so low in Germany that its farmers are unsure if they have enough feed for their livestock, according to the International Grains Council.
 Western Europe's troubles follow on from dry weather in the Black Sea region, which incorporates parts of Russia, Ukraine and Romania. Market participants believe that while European prices may have peaked, Chicago futures have further to climb.
 “I don't think [U.S.] farmers recognize the extent of the opportunity they have, but it's going to be very big," said AgResource's Ben Buckner. “If everyone comes to the U.S. in November, it could be incredible, and that part hasn't yet been fully digested.”

European wheat prices have soared, with Chicago futures following.

Note: €1 = $1.16
Source: FactSet



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