Traders are watching soft commodities as the world enters into the growing season and what we are not finding is rain in the world’s wheat fields.
Drought is crushing wheat farmers from Australia to United States and everywhere in between, including Russia and South Africa.
Australia, Russia and the United State. are likely to end up with the largest yield reduction to global supply since the 2003 supply shortage, which could in turn send prices soaring to the highest in a year.
Traders are already beginning to see wheat prices rise ahead of the yield this season. Wheat climbed 18% in just 10 day in Chicago on the worries that this year’s droughts will be similar to 2010, when Russian and Ukrainian exports dropped like a rock.
That time around, prices doubled and we saw revolution in grain-dependent North Africa.
On May 10, the USDA reported global wheat yields will decline by 2.5% to 677.56 million metric tons for the June 1 crop year.
This would bring global supply to its lowest since 2009 at 188.1 million tons. Analysts now fear the USDA will most likely reduce its production forecast to around 669 million tons reducing wheat inventory forecast to roughly 183 million tons for its scheduled June 12 report.
The head of National Meteorology Center in Kiev, Tetiana Adamenko, is warning as much as 30% of the eastern and southern Ukraine wheat crop could be lost due to extreme dry weather conditions. This could drop wheat yields from the Russian region by as much 15% if rain in the region remains below average.
Russia is not the only dry place on the plant in the U.S. Kansas has only received 0.39 inch of rain May 1 to May 20, according to the state’s climatologist. Kansas is track for a record low of 0.98 inch for the month of May set back in 1966.
Looking at Western Australia, farms see much the same dry conditions as the rest of the world. Australia is the second-largest wheat exporter next to the U.S. and as it looks right now with below average rain for April and May, those exports could drop by 12% to only 26 million tons, according to USDA data.
And if it isn’t the lack of rain, France, Germany and Poland have discovered that their wheat crops were damaged by unusually cold weather in February. These countries make up 10% of the world’s output in wheat.
The euro zone reduced its outlook forecast to 126.7 million tons last month — roughly 4.7% below March forecasts.
Bottom Line: If the drought continues in Australia, Russia and the United States, already fragile wheat yields may severally be reduced and grain prices will climb. An increase in cost for frontier countries will hinder growth and even slow hard-hit emerging markets as more resources are spent on food.