NEW YORK - Farmers are sowing the seeds for an end to the biggest rally in wheat since the Soviet Union cornered the US market in the 1970s.
Growers from Kansas to India are preparing the world's largest wheat crop in 10 years, overwhelming demand and refilling barren grain bins. The grain has risen 74 per cent in price this year, the most of any farm commodity.
Prices will fall 30 per cent to US$6 ($8) a bushel within a year, said James Gutman at Goldman Sachs Group in London and Pierre Martin, manager of a US$490 million commodity fund at DWS Investment. Chicago futures markets show a similar drop.
Hedge funds have curbed their bets on the rally, trimming net long positions in futures and options contracts by 44 per cent in the past five weeks, government data shows.
"Would I buy wheat today? No," said Jim Rogers, the chairman of Beeland Interests, who predicted the start of a rise in commodity prices in 1999. "Wheat has been going straight up for about a year. I don't like to jump on a moving bus."
Wheat has never been more expensive relative to corn, soybeans and cotton.
Rising prices spurred Italian consumers to boycott pasta and bread this month, while South Korean livestock producers reduced imports.
"As farmers expand production, inventories will likely recover, and thus prices would fall sharply," said Gutman, whose team anticipated the rally in commodities this year. He recommends buying corn because of demand for biofuels.
Wheat for December delivery, the most active contract, rose 2.8 per cent to US$8.74 a bushel on Friday. The crop reached a record US$9.1125 this month on the Chicago Board of Trade after weather damaged crops from Canada to Australia, and inventories are headed to their lowest in 26 years. Record wheat and milk prices fuelled a 2.4 per cent increase in US inflation this year.
The price of the grain last climbed this fast in 1973 after crop failures forced the Soviet Union to quadruple wheat imports to 15.6 million tonnes, including about 30 per cent of US exports that year.
Farmers will harvest at least 3.3 per cent more hectares next year than they did this year, said William Tierney, executive vice president at John Stewart & Associates in Washington, a consulting company, and a former US Department of Agriculture economist. Prices will likely fall 50 per cent by July, he said.
"Unless you are going to predict a third consecutive year of crop problems, prices for July Chicago wheat futures may fall below US$4 from US$6.29 on Friday," Tierney said. Wheat production worldwide will rise 4.1 per cent to a record 641 million tonnes, he said.
Martin of DWS Investment, a unit of Deutsche Bank, is reducing his wheat holdings in favour of corn and soybeans, he said, declining to be more specific.
Malinda Goldsmith, a partner at Four Seasons Commodities in Dallas, is selling wheat and buying corn, anticipating a decline in wheat's record premium.
So-called net long positions in Chicago totalled 21,197 futures and options contracts last Tuesday, down from 37,768 on August 14, US Commodity Futures Trading Commission data shows.
The surge in grain prices means aid to developing nations from the US, the European Union and Australia may drop to 5.5 million tonnes this year, the lowest since the 1960s, said Abdolreza Abbassian, an analyst at the Rome-based United Nations Food and Agriculture Organisation.
The FAO has recorded riots over food in Niger, Guinea, Burkina Faso and Yemen, he said.
The EU on September 13 unveiled plans for a one-year moratorium on rules that require farmers to leave 10 per cent of their land fallow.
US farmers, the biggest wheat exporters, have until Monday to lock in government-funded crop insurance that guarantees a record pre-planting price of almost US$6 a bushel at harvest, 50 per cent higher than the average of the past two seasons.
Growers in the Northern Hemisphere are seeding crops that may result in the largest harvest acreage in any year since 1997, according to Tierney.
Amy Reynolds, a senior economist at the London-based International Grains Council, said: "We'll probably see an increase in the European Union, the US, potentially also in Canada, and although it's early to say, Australia and Argentina." Wheat plantings rose 2.9 per cent to 214 million hectares this season, she said.
Farmers respond to high prices with more supplies than in any other industry, said Michael Swanson, senior agricultural economist at Wells Fargo & Co in Minneapolis. In the past two years, high prices for sugar and corn led to larger-than-expected production and price declines.
Global sugar prices are still falling, 18 months after reaching a 25-year high, as production overwhelms demand and inventories increase. Sugar futures are down 29 per cent in the past year in London and are off 13 per cent in New York.
After corn set a 10-year peak in February, US farmers increased plantings by an unprecedented 19 per cent to37.6 million ha, the most since 1944. US government-subsidised crop insurance guaranteed farmers a record US$4 a bushel before any seeds were planted this year, and similar programmes will boost wheat hectares, Tierney from John Stewart & Associates said.
India, the third-largest importer of wheat last year, is unlikely to buy more because it has sufficient supplies. The South Asian nation bought 1.3 million tonnes in the past two months. "We don't need to import," Agriculture Minister Sharad Pawar said last week.
Prices are so high that livestock producers are reducing purchases and using alternatives.
"We've been buying more corn to replace wheat," said Kim Chi Young, purchasing manager with the Korea Feed Association, the country's biggest feed-grain importer. Suppliers offered feed wheat in late August at US$424.73 a tonne, Kim said. The price was 60 per cent more than corn.
General Mills., the second-largest US cereal maker, is raising prices to protect profits. The Minneapolis-based company last week said fiscal first-quarter earnings rose 8.2 per cent to US$288.9 million, or 81 cents a share.
"We're monitoring the commodity environment very, very closely to see if we might have to pass on some additional costs," said Kendall Powell, president and chief operating officer at General Mills, where grains represent about 10 per cent of its cost of goods.
Some wheat investors say poor weather may yet wipe out any gains from additional plantings. A 2.6 per cent increase in harvested acreage this year failed to produce more grain after drought in Australia and rains in the US and Europe damaged crops.
"You can plant all the acres you want," said Richard Crow, president of Crow Trading, a US$40 million agricultural commodity fund in Memphis, Tennessee. "You still have to have good weather."
Goldman Sachs's Gutman said wheat today reminds him of the nickel market earlier this year, where prices reached a record in May only to collapse about 50 per cent in the next three months. Morgan Stanley's Hussein Allidina, commodity research strategist in New York, said farmers should sell as much of next year's crop as possible to lock in prices.
"Wheat's a bull that's going to die hard," said Tomm Pfitzenmaier, a partner at Summit Commodity Brokerage in Des Moines, Iowa.