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The coldest start ever to the wheat-growing season in Kansas and freezing weather across the southern Great Plains are compounding damage to U.S. crops already hurt by the worst drought since the 1930s.
"I'm going to assume 75 percent of my wheat froze" when temperatures dropped as low as 13 degrees (minus 11 Celsius) on April 10, said Gary Millershaski, who has been farming in southwestern Kansas for three decades and this year planted 2,800 acres of hard, red winter wheat on his land near Garden City. "It looks like someone sprayed a defoliant on it."
Farmers in the United States, the world's biggest exporter, probably will abandon 25 percent of their hard, red winter wheat, the most common variety grown, according to the average of 11 analyst estimates compiled by Bloomberg. That would be the most since a drought in 2006. Societe Generale expects U.S. output will drop 27 percent, sparking a 14 percent rally in Kansas City wheat futures to $8.50 a bushel by the fourth quarter.
Wheat sown from September to November went dormant over the winter as drought left crops in the worst condition since at least 1985. Growth resumed in March, and temperatures this month in Kansas, the largest U.S. grower, were the lowest in more than a century for areas that produced about half of the state's harvest last year. Global supplies will drop to the smallest in four years as production declines from Argentina to Russia to Australia, the U.S. government estimates.
Production of winter wheat, which accounts for 72 percent of all U.S. varieties grown, will drop 3.9 percent to 1.581 billion bushels (43 million metric tons), Informa Economics Inc., a Memphis, Tenn.-based research company, said on April 19. Of the total, the hard, red variety will decline to 850 million bushels from 1 billion. The U.S. Department of Agriculture will make its first estimate on May 10 based on a survey of farmers.
Mean temperatures across four of nine crop districts in Kansas in the first 18 days of April were the lowest since record-keeping started in 1895, said Mary Knapp, the state climatologist. The cold snap came as analysts, traders, farmers and buyers prepared for the Wheat Quality Council's annual three-day tour of Kansas fields starting April 30. The group will issue a forecast for the harvest, which starts in June.
Even after this month's rally, wheat has been in a bear market for much of the year. Kansas City futures dropped 22 percent from the closing high on Sept. 14, mostly on expectations that the drought would end and global grain supply will increase later in 2013. Prices on the Chicago Board of Trade, the global benchmark, tumbled 26 percent from a peak on July 20.
While cold weather and drought hurt crops in western Kansas, farmers in the eastern two-thirds of the state and in Oklahoma won't abandon fields because most got enough moisture and avoided freezes, said Bill Spiegel, a spokesman for the Manhattan, Kan.-based industry group Kansas Wheat. Should rain fall and temperatures moderate, even those with damaged fields may harvest a "decent" amount of grain, he said.
A decline in supply may reverse a six-month, 7.1 percent slide in global cereal costs tracked by the United Nations' Food & Agriculture Organization. The Rome-based group anticipates a 4.4 percent increase in wheat production to 690 million tons this year, led by the 27-nation European Union and the nine- country Commonwealth of Independent States.
Hedge funds are getting less bearish, trimming their net- short position in Chicago futures and options to 27,178 contracts in the week ended April 16 from 49,223 in February, Commodity Futures Trading Commission data showed on April 19.
A rally in prices may increase costs for companies from Mexico City-based Grupo Bimbo, the largest bread maker, to General Mills, the owner of the Wheaties cereal brand. The Minneapolis-based company's grain-price hedging program extends to the end of the fiscal year on May 31, Chief Financial Officer Donal Leo Mulligan said on a March 20 conference call.
As of April 16, 73 percent of the six-state High Plains region that covers North Dakota, South Dakota, Nebraska, Wyoming, Kansas and Colorado was in severe drought, which means crop losses are likely, according to the Lincoln, Neb.-based U.S. Drought Monitor. Drought in the southern Plains caused blowing dirt similar to the Dust Bowl era of the 1930s.
While the situation has improved from an 87 percent severe drought rating three months ago, it compares with 4 percent a year earlier. In Kansas, every county is classified as being in some level of drought, with 61 percent rated extreme.
June, July and August may bring extreme heat that would further sap moisture from the soil, MDA Weather Services in Gaithersburg, Md., said in a report on April 18. Temperatures will be "warmer than the 30-year norm," MDA said.
Growers from South Dakota to Texas seeded 28.9 million acres with hard, red winter wheat late last year, a variety that accounts for 44 percent of U.S. wheat output, government data show.
When plants went dormant in November, about 33 percent of the U.S. winter-wheat crop was in good or excellent condition, the worst for that time of year since at least 1985. As of April 21, 35 percent got the top rating, below the five-year average of 51 percent.
"I've never seen the ground as dry as it is," said Millershaski, president of Kansas Area Wheat Growers, an industry group. "We're drier than we were in the Dirty Thirties."
The USDA is forecasting record farm income of $128.2 billion this year and the ratio of debt to equity is the lowest ever at 11.3 percent. Many farmers were protected from the drought last year by crop-insurance payouts that reached an all- time high of $17 billion.
Unusually cold weather may delay planting of spring wheat in North Dakota, Minnesota and Canada, the second-largest exporter. Ice delayed the start of grain-barge shipments by about three weeks on the upper Mississippi River until April 8, the USDA said April 11.
Investors should buy Kansas City wheat because of the damage from drought and freezing weather, Christopher Narayanan, the head of agricultural research at Societe Generale in New York, said in a report on April 18. Yields will tumble about 15 percent to 34.6 bushels an acre, he said.
"We were struggling without moisture, and now we've added this cold weather to the situation," said Larry Glenn, an analyst at the Frontier Ag grain elevator in Quinter, Kansas. "I don't think farmers are putting a lot of hope that yields are going to be great."