ERS have been watching wheat markets breathlessly over the past few days as the grain bounced up and then down. Having gained 8.08 per cent last Thursday – up 80 per cent on prices in the middle of June – the grain plummeted on Friday, wiping out much of Thursday’s gain to end the day down 7.64 per cent. But while on the surface the price of food is shooting up, the fundamentals don’t justify the amount of money pouring into soft commodities in the hope of a sustained short-term rally.
Wheat prices’ yoyo-ing movement was prompted by a Russian export ban after fires in the ex-Soviet region wiped out an unknown amount of this year’s harvest. Gary Vaughan-Smith of SilverStreet Capital estimates that the disaster has cost the Black Sea region – which accounted for 27 per cent of wheat exports last year – about 30 per cent of its production. Meanwhile, too little moisture in the east has coincided with far too much in the west: the Canadian Wheat Board estimates that its wheat exports will be 17 per cent lower than last year due to heavy rains (Vaughan-Smith puts the damage higher, at a third of last year’s production). Add in the threat of locusts hovering over Australia’s yield and you have conditions ripe for panic-buying – followed by a profit-taking correction.
Meanwhile, the price of barley has nearly doubled since early June, soyabeans enjoyed a sustained rally in July and maize prices are up 10 per cent on this year’s average. The upwards trend in staples has prompted comparisons to the 2007-2008 food crisis amid fears that we are in for another sustained jump in prices (see chart).
But comparisons with the last food panic are over-egged, say some. For one thing, the world began 2009-2010 with much more in the granaries than had been set aside at the beginning of 2007-2008. According to estimates from the International Grains Council, we started this growing year with global grain stocks at 370m tonnes – 27 per cent higher than they were at the outset of 2007-2008. While this isn’t a huge surplus, it should allow the market to absorb recent supply-side shocks with relative ease. Barclays Capital’s Sudakshina Unnikrishnan says: “Global supply is at comfortable levels and that is likely to cap significant upside momentum to prices.”
Moreover, CMC Markets’ Michael Hewson says there is another fundamental difference between the recent rallies and the 2007-2008 highs: “Whereas in 2008 there was the perception of a demand problem, at the moment there are concerns about supply. But Russia’s harvest problems don’t justify a doubling of the wheat price in six weeks. A lot of hot money has gone into this.”
And punters seem to be trading on the assumption that prices could be about to spike as they did in 2008 (see chart). Global food demand is rising as consumers in Asia become wealthier and start eating more protein. But without further supply-side shocks in the coming months, there is no reason to think that prices will continue to ramp up at such speeds in the short-term.
So although the Black Sea fires have depleted stocks and made this year’s supply of grains more sensitive to any impending shocks, traders might have missed this spike. Instead, try waiting for a small rally in bread and livestock prices due to the jump in input costs. Or, better still, with so much hot money floating around, it is well worth getting in early on the next grain-buying panic – try rice.