A Closer Look At The Impact Of The Wheat Crisis

Tyler Durden's picture

Good thing humans don't eat or use energy or else the highly "accurate" core CPI, courtesy of the draught and harvest catastrophe in Russia, causing wheat prices to literally take off, might actually reflect reality for once. A closer look at the consequences of the grain export collapse in the third biggest exporter in the world: "Russia’s domestic prices rose even more within the last 30 days. In addition, on August 5, Russia announced a ban on grain exports through year-end, effective August 15. This should  help contain further domestic price gains, but may send global prices even higher. J.P. Morgan’s commodity team expects that any meaningful decline in prices is unlikely to occur before late 2010, but wheat prices are forecast to recede to below $6/bu in 2011, as higher prices now are likely to promote increased global planting."

From JP Morgan


And here's Goldman 

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AUD's picture

Interesting to see such commodity volatility just when the USD index rolls over. The recent spike looks more powerful than any time during '06-'08.

Sugar had a big move on the previous USD roll over.

Sudden Debt's picture

the rise in price is just high enough now to cut the subsidization of the wheat farmers. Let's keep it where it is.

It's also a very good thing for creating inflation.


dan22's picture

If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash

China has been suffering from surging wage and food prices for the last few months. However, since there were a lot of restrictions on imports prices in China were much higher than in the rest of the world, especially the United States and Europe. But recent developments signal that the arbitrage is starting to close. The direct implication of this development is that the Federal Reserve’s hands are tied even more, it simply can’t resume Q.E until the demand from China cools down, and that is happening during a classic deflationary spiral in the Western Economies.

The arbitrage in corn prices is being closed via a surge in exports from the United States to China:

China has purchased more U.S. corn this year than at any point since 1995 as soaring domestic prices and rising needs for livestock feed have boosted China’s demand for corn from the world’s top exporter.
One cargo of U.S. corn has already landed in China and started unloading and two to three more are scheduled to begin loading at U.S. ports this week, tempering at least some fears that China could not take delivery of the corn.

Only a month has passed since these articles were published and yet wheat prices have risen almost 50% from their lows, while corn and rice prices closely followed
If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash

BearOfNH's picture

One cargo of U.S. corn has already landed in China and started unloading and two to three more are scheduled to begin loading at U.S. ports this week

Where a "cargo" is about 2 mega-bushels, or a mere 400 CBOT contracts out of a position limit of 600 (IIRC). Admittedly a lot of corn but not enough to really move the price significantly.

CPL's picture

I love how economists assume that there is infinite land and everyone is going to bum rush into producing wheat when reading the reports they have zero clue on how farming actually works.  They even go so far as to mention how planting seeds makes plants, which is true, what they are missing is failure rates on first time crops planted (even with expensive gm seeds), and complete omit the fact there's a locational requirement that allows wheat(corn in old english) to be grown effectively. The reports make it sound like China will start draining rice patties to make room for corn or some how magical water will appear in deserts.

I do agree there will continue to be a bull run on the price of wheat and corn plus the livestock those two feed. But it will be from slowly shrinking yields and the general cost of having the qualified bodies and equipment to plant, harvest and store grains.

Youri Carma's picture

Excerpt: But before people start hoarding sacks of flour, it might be a good time to review some marketplace fundamentals. According to the USDA, wheat inventories in this country are at a 20-year high. So there’s plenty to draw down, and plenty to sell to markets the Russians are briefly backing out of.

From: Putin touches the heartland - Ban on Russian grain exports pumps up the wheat bubble - 5 August 2010, (MarketWatch) http://www.marketwatch.com/story/putin-touches-the-heartland-2010-08-05


Eternal Student's picture

Hoarding flour is a really, really bad idea. Flour will start going bad from the day it has been milled. It's got a shelf limit to it. Don't buy flour that you aren't going to use.

If you're going to hoard anything, you want to hoard the wheat berries themselves. These will last literally forever if stored properly (note the "if"). And you want to have a mill on hand.

Chartist's picture

Core CPI should include food and energy with a six month or one year moving average if the government is so worried about volatility.

Johnny Dangereaux's picture

One thing to keep in mind also is that the futures can trade beyond the "limit" price by using options and creating a "synthetic". Yesterday on the open Sep wheat was actually 810 bid at 820 ask, so it was beyond "limit up". The real story was the corn sell-off. New lows on the close-24 cents off the high of the day and now thru that price this a.m. Buying corn might not be all it's cracked up to be, Jimmy.

Janice's picture

Tell Jimmy that I don't care.  : )

Zina's picture

"Core CPI" is a joke.

How you can exclude food and energy from the CPI?

Can you live without eat?

Can you survive the winter without energy for heating? (Well, I can, coz I live in Brazil, but you in the Northern Hemisphere, can not..)

Japhy Ryder's picture

Maybe a July issue of the Economist has something to do with this.

"A crop-killing fungus is spreading out of Africa towards the world’s great wheat-growing areas"

"Wheat rust is not just back after a 50-year absence, but spreading in new and scary forms. In some ways it is worse than child-crippling polio, still lingering in parts of Nigeria. Wheat rust has spread silently and speedily by 5,000 miles in a decade. It is now camped at the gates of one of the world’s breadbaskets, Punjab."




Flyingtrader's picture

Norman Borlaug, we miss you.

carbonmutant's picture

Some people believe Monsanto intends to profit from this disaster

senthil456's picture

There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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