Wheat Bear Market: Blame a Peace Seeking Russia and Good Weather

NEW YORK (TheStreet) -- Wheat prices moved into bear market territory this week, with dissipating winter storms in the U.S. and rather strife between Russia and Ukraine cited as the main catalysts. The improved outlook has not caught up with farm machinery makers such as Deere  (DE) and Caterpillar  (CAT).

The U.S. Department of Agriculture said Wednesday that global wheat output would increase to 701.6 million metric tons this year from the 697 million forecast last month as production outside the U.S. increases.

The report spurred wheat futures for July delivery to fall to $5.8875 a bushel, a more than 20% decline from its highs of $7.44 a bushel in May.

The USDA report deviates widely from the sentiment wheat speculators felt at the beginning of the year. In January, wheat prices were bid higher as speculators saw political turmoil in Ukraine and severe winter storms in the U.S. as reasons global output would decline in 2014.

The winter storms lasted much of the first quarter, and tensions remained elevated between Russia and Ukraine for many months, but for the most part, optimism for the future has picked up.

Summer weather is expected to be a mix of rain and sunshine with warmer temperatures throughout the U.S. This should repair some of the winter damage and increase U.S. yields out by September.

A more impressive story, however, has been the drastic turnaround in sentiment regarding Russia.

After Ukrainian President Viktor Yanukovych was exiled from the country for his ties to Russia, and Crimea was annexed from Ukraine, many believed a full-on war was imminent.

Warfare did ensue, but mostly between Russian separatists and Ukrainian forces, causing most of the violence to be perceived as infighting, as opposed to an actual act of war between Russia and Ukraine.

On Thursday, Russia's Foreign Minister Sergei Lavrov said publicly that Russia plans to submit a resolution to the U.N. Security Council, putting pressure on Ukraine to implement a "road map" for peace.

Reports have even stated that Russia's involvement in Crimea's ports have expedited wheat exports, and at reduced prices have ultimately flooded both Asian and European markets with supply.

Although outlook has improved in both Russia and the U.S., similar success has not yet translated to farm machinery companies Deere and Caterpillar.

The Associated Press reported on Thursday that both U.S. tractor and combine sales were down in May from the same time period last year

A John Deere dealer in Wichita, Kan., told AP it is selling fewer pieces of equipment but has gained business for repairs of older equipment

Falling wheat prices may be great for global consumers while keeping food inflation tepid, but increased business activity as supplies accelerate could be the best case scenario for equity markets in future months.

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At the time of publication, the author had no position in any of the funds mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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