Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Soaring Wheat Price Lifting the Whole Global Grains Market Higher

Commodities / Agricultural Commodities Aug 16, 2010 - 04:53 PM GMT

By: Ned_W_Schmidt

Commodities

Best Financial Markets Analysis ArticleChart below of the Agri-Food Price Index makes a very clear statement on the state of Agri-Food prices. Index continues at a new cycle high. Versus the all time high of 2008, it is down only 3%. Those results compare more than favorably with the dismal results of the U.S. equity markets.


While the prices of Agri-Foods do not translate directly into investment performance, it is the framework for returns to be earned by those investments. Further, movement of Agri-Food prices is based on global markets that are tightening in a permanent manner. Many misinformed pundits have failed to note continuing growth of demand for Agri-Foods due to income growth in China and India. And most important, the market for wheat and the market for iron ore are different markets.

When we visited last, wheat, in above chart, was just beginning the break out from the bear trend in which it had been trading. In a matter of weeks, the price of wheat has moved more than 70%, and recently made a new 90-week high. Further, that price action has moved the entire global grain market to higher prices. If those using wheat as animal feed, particularly in Russia, are unable to obtain wheat, they will utilize some other grain. That shift to other grains will push up those prices.

The catalyst, not the cause, of higher wheat and grain prices is the severe drought in Western Russian and surrounding region. Russia, a major wheat exporter, has banned wheat exports through December. That date is important as wheat is not produced in a factory, but rather grown in a field. Clearly, no grain is produced in Russia in December or January. That date does, importantly, allow sufficient time to determine the potential of the Russian winter wheat crop which should be put in the ground next month. However, at the present time the drought has so reduced ground moisture that much of the Russian winter wheat crop may not be planted.

Real cause of higher wheat prices, as well as higher grain prices in general, is world’s just in time inventory approach to Agri-Food. Most nations and food businesses operate as if the world was awash in Agri-Food. Just in time inventory management works with continuous manufacturing processes. It is doomed to regular failure given annual batch production of Agri-Food.

USDA’s most recent forecast places wheat stocks in the next year at only 3.2 months of consumption. As that is the average and includes the massive reserves of China, much of the world has far fewer months of wheat consumption in reserve. For the world, the difference between shortages of 2008 and today’s supplies is only about 0.8 months of consumption. Converted to days, world has 24 days more of wheat than it did in 2008. Eat up, while you can.

As is apparent in the above graph, a clear beneficiary of all this is U.S. grain exports.  That graph portrays the year-to-year change for U.S. grain that has been exported or is to be exported in the current crop year. U.S. has exported 13% more grain this year than last. Export sales yet to be exported are up 19%. Taken together, U.S. grain exports are up 14%.  Accelerating those trends are U.S. export sales of wheat, June 1 start of crop year, which are 53% ahead of last year. Rice export sales, which started a new crop year 1 August making the statistics less than ideal, are up 57%.

While Russia suffers from lack of water, Pakistan is suffering from too much water. Floods in that country have destroyed 17 million acres of planted crops and more than a million tons of grain in storage have been washed away. Pakistan had the world’s largest integrated irrigation system, and the damage to that system is extensive but unknown at the present time. As the world’s third largest exporter of rice, the condition of that production remains uncertain. Much of that rice will likely need to be consumed domestically, thus limiting rice exports.

We need to acknowledge some realities of Agri-Food. The world does not have as much Agri-Food as many believe. In less than a month without wheat production somewhere in the world, shortages would develop. Given the current situation, wheat shortages are possible at the beginning of the new year. Second, while technology can enhance Agri-Food production, it cannot make wheat grow without water. Third, the iPad is cool, but it cannot produce food.

At what price will wheat sell in ten years? Is US$18 a bushel possible? Corn perhaps at $11? In a price inelastic world such as is now the case for Agri-Food, prices will be far higher than historical precedent suggests. Many remain mired in the eras of bounty now part of history. Let your thinking become freer by reading  The Joy of Agri-Food Price Inelasticity. Perhaps then you will be able to feed your family when  palm oil is US$2,100 a ton and eggs are US$2.50 a dozen at wholesale.

By Ned W Schmidt CFA, CEBS

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com.

Copyright © 2010 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in