What Drought? Wheat May Surprise

What Drought? Wheat May Surprise

Drought may have ravaged key wheat-growing areas across the U.S. last year, but farmers still planted a surprisingly large crop this past fall, despite the dry soil.

Growers in Kansas, Oklahoma and Texas sowed more wheat last year than the year before. Some said they were lured to plant in large part by the prospect of receiving high insurance payouts if the crops failed. Others just wanted to keep their topsoil from blowing away.

In all, the amount of the crop known as winter wheat that U.S. farmers planted was 41.9 million acres, up 3% from 2010, according to the latest data from the U.S. Department of Agriculture.

The prospect of a big crop from the world’s biggest exporter surprised many investors and comes on top of big harvests from Argentina, Australia, China and Kazakhstan.

The International Grains Council recently boosted its estimate of this year’s world wheat crop to a record 690 million metric tons, or 25.4 billion bushels. The council also estimates the amount of wheat that already has been harvested and is being held in silos and grain terminals will stand at a near-record 204 million metric tons by the middle of the year.

That is liable to put a cap on wheat prices, which have risen 6.5% since mid-January but are still well off the highs hit last year. Wheat futures climbed 1.2% on Wednesday to $6.41 a bushel on the Chicago Board of Trade.

“In reality, U.S. and world wheat supplies are huge, and that will restrict prices from advancing,” said Shawn McCambridge, senior grains analyst with Jefferies Bache in Chicago.

The current ample supplies stand in contrast to the situation just two years ago, when prices were jolted by a searing drought in Europe that forced Russia, which has recently emerged as a big exporter, to suspend shipments. Still, analysts are concerned Russia won’t be unable to keep up its brisk export pace.

Farmers were enticed to keep planting wheat by unusually high crop-insurance payout rates this year. Crop insurers provide payments to farmers if their harvests fall short of an agreed-upon level.

The payout rate is based on average futures prices for a monthlong period in the summer. The period on which last year’s payment was based came before futures pulled back sharply for much of the fall, so farmers who bought insurance can collect $8.62 a bushel in the southern Great Plains. On Wednesday, hard, red winter wheat — the particular crop grown in that region — was up 1.6% to $6.97 at the Kansas City Board of Trade.

“That strong crop insurance really gave them a hope that they could actually make some kind of a profit this year,” said Sterling Liddell, vice president of research for Rabobank, a farm lender.

Wheat farmers receive payments based on the average number of bushels a field produces compared with a number set in the policy. If a parcel yields 18 bushels an acre but the policy set a floor of 20 bushels, the farmer is paid the difference. Farmers can take out insurance on 50% to 85% of their crop.

The number of crop-insurance policies sold at Sidwell Insurance in Goltry, Okla., jumped 8% to 10% for the current crop, said owner and agent Brenda Sidwell. The jump in the number of policies is reflective of the added risk of planting in an area that has experienced extreme weather in recent years, Ms. Sidwell said. And many lending institutions require farmers to have insurance in the event of crop losses from weather, she said.

David Schenn, who farms 13,000 acres in western Kansas, said he has 70% of his crop covered. He said this year’s high payout rate gave him confidence to take a gamble on the weather. “Wheat crops have nine lives and can recover if they get timely rains,” Mr. Schenn said.

Other growers sowed land to prevent winds from blowing soils from parched lands. And many farmers shied away from crops such as corn that are even more difficult to coax from dry fields.

“If we get timely rains, we could have a very large wheat crop,” said Mike O’Dea, an analyst with brokerage FCStone.