MNeagle
20th August 2010, 05:26 AM
TOKYO (MarketWatch) -- The recent run-up in wheat prices to their highest level in almost two years may offer the good kick-in-the-pants the world needs to realize just how fragile the global grain market really is.
Of course, it may take a bigger rise in wheat, corn and soybean prices to convince it.
Wheat futures prices closed above $8 per bushel on the Chicago Board of Trade earlier this month, the highest settlement price for a most-active contract since August 2008, after Russia placed a temporary ban on grain exports in the face of a devastating drought.
That's a price spike of nearly 70% in two months. Read the Aug. 5 story on the wheat rally.
The move then spilled over into other grains. Corn and soybeans remain at more than 10% above their mid-June levels.
The price action in wheat has "moved the entire global grain market to higher prices," Ned Schmidt, editor of the Agri-Food Value View said in his latest report. "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."
And while the drought in Russia and the surrounding region is the "catalyst" for the higher grain prices, it's not the "cause," he said.
The "real cause ... is [the] world's just-in-time inventory approach to Agri-Food," he said, referring to agricultural foods which include grains and meats.
The global food crisis of 2007-2008, a time when food prices surged and grain prices reached record highs, is a good example of that.
The food crisis was "a warning, not a one-off event," said Chris Mayer, contributor to The Daily Reckoning and editor of Capital and Crisis. Read some of Mayer's commodities articles.
"It was a warning telling us how fragile the food supply system is," he said.
More problems in store
The resulting rise in grain prices from supply shocks will only be part of the problems in store for the grains market.
"The dynamic agricultural markets are always at risk of explosive rallies if the growing seasons have problems," said Alan Knuckman, contributor to The Daily Reckoning and editor of Resource Trader Alert. Read some of Knuckman's articles on commodities.
"Right now, other parts of the world are ready to make up for the decline in Russia, but it illustrates how quickly price volatility emerges with the upside risks of disruptions or weather issues," he said.
Weather issues abound worldwide, not only with the drought in Russia and its surrounding region, but in the U.S. where it's been wet in the northern Corn Belt and dry and hot in the Delta and Southwest, said Scott Capinegro, president of Barrington Commodity Brokers in Illinois. There's also flooding in China and Pakistan, he said.
Over in the U.S., there will be an "acreage battle " between wheat, soybeans, corn and cotton, said Capinegro, pointing out that winter wheat acres will be "huge" because of the high price of wheat and lower price for fertilizer.
Then, after the corn and soybean harvest, much of that crop land used for corn and soybeans will be devoted to wheat, he said.
The market already knew it would need 4 million more acres for next year's corn crop based on demand, but with Russia's smaller wheat crop feed usage, much of that demand will move to corn -- then it'll need an additional 4 million to 6 million acres for corn, he said.
http://s.marketwatch.com/public/resources/MWimages/MW-AF807_wheat__ME_20100805195910.jpg
Demand is the bottom line," Capinegro said.
And as incomes rise, so do demands for meat.
"The first thing very poor people do when their income rises is improve their diet," said Tony Sagami, editor of Asia Stock Alert.
"That generally means an increase in the consumption of protein" or meat, he said. The higher consumption "means an increase in the use of feed grain so wheat is one of the brightest futures of all food commodities."
"Third World governments should prepare for food riots and social unrest," he said.
Not quite a crisis
For now, the panic, along with the threat, of a food crisis has subsided.
"The wheat market has made a huge move, but needs another catalyst or issues to develop elsewhere in the world to drive prices higher," said Knuckman.
Prices for wheat have declined in seven out of the last ten sessions as of Thursday.
"The global situation has tightened, but given the abundant stocks situation heading into this marketing year, supplies are not as tight as the $4-plus rally in Chicago [wheat] futures would indicate," said Darin Newsom, senior analyst at Telvent DTN.
Although Black Sea -- Russia, Ukraine, Kazakhstan -- wheat exports are expected to "plummet" 60% on drought-reduced crops, traditional exporters, particularly the U.S., are "holding large supplies that are more than sufficient to compensate for the Black Sea shortfall," the U.S. Department of Agriculture said in a grain market report issued this month.
Russia and the former Soviet Union account for around 15% of world wheat exports, according to Capinegro.
But U.S. ending wheat stocks at 26 million tons are three times larger than just a few years ago, according to the USDA.
"We here in the U.S. have a large wheat supply," Capinegro said. "We won't run out of wheat for our use and export, so the world needs wheat we can supply."
Taking a chance
Even so, the prospects for higher grain prices remain, along with investment opportunity.
"The heart of the matter is that commodities continue to draw in a great deal of investment money, increasing the volatility," said Newsom. "With world stock markets still in a state of flux, long-term investment money has nowhere to go so it migrates to short-term commodities, chasing the latest headlines along the way."
At the same time, "there is not a lot of fat built into the [food supply] system and it remains susceptible to supply-side shocks," said Mayer.
To invest in grains, there is a futures market, exchange-traded funds or stocks tied to grain companies, Newsom said. The ETFs he tracks include the iPath Dow Jones UBS Agriculture Subindex Total Return ETN /quotes/comstock/13*!jja/quotes/nls/jja (JJA 45.88, -0.01, -0.02%) and PowerShares DB Agriculture Fund /quotes/comstock/13*!dba/quotes/nls/dba (DBA 26.17, +0.09, +0.35%) .
"As a longer-term theme for investors, agriculture should be a great place to be," Mayer said. "We have a growing global population out to 2050 and we need to boost food supply by 70% or more, according to the [United Nations]. That will create opportunities for companies in everything from fertilizers to irrigation equipment."
Still Todd Hultman, editor of DailyFutures.com said he'd "hate to buy any grain in the middle of a weather scare."
"The one concern that I have for the grain markets is the effect of a sluggish world economy," he said. "After the weather scare dies down and we see how much grain is available, what will the demand be like?"
http://www.marketwatch.com/story/wheat-crop-scare-rattles-global-nerves-2010-08-20?pagenumber=2
Of course, it may take a bigger rise in wheat, corn and soybean prices to convince it.
Wheat futures prices closed above $8 per bushel on the Chicago Board of Trade earlier this month, the highest settlement price for a most-active contract since August 2008, after Russia placed a temporary ban on grain exports in the face of a devastating drought.
That's a price spike of nearly 70% in two months. Read the Aug. 5 story on the wheat rally.
The move then spilled over into other grains. Corn and soybeans remain at more than 10% above their mid-June levels.
The price action in wheat has "moved the entire global grain market to higher prices," Ned Schmidt, editor of the Agri-Food Value View said in his latest report. "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."
And while the drought in Russia and the surrounding region is the "catalyst" for the higher grain prices, it's not the "cause," he said.
The "real cause ... is [the] world's just-in-time inventory approach to Agri-Food," he said, referring to agricultural foods which include grains and meats.
The global food crisis of 2007-2008, a time when food prices surged and grain prices reached record highs, is a good example of that.
The food crisis was "a warning, not a one-off event," said Chris Mayer, contributor to The Daily Reckoning and editor of Capital and Crisis. Read some of Mayer's commodities articles.
"It was a warning telling us how fragile the food supply system is," he said.
More problems in store
The resulting rise in grain prices from supply shocks will only be part of the problems in store for the grains market.
"The dynamic agricultural markets are always at risk of explosive rallies if the growing seasons have problems," said Alan Knuckman, contributor to The Daily Reckoning and editor of Resource Trader Alert. Read some of Knuckman's articles on commodities.
"Right now, other parts of the world are ready to make up for the decline in Russia, but it illustrates how quickly price volatility emerges with the upside risks of disruptions or weather issues," he said.
Weather issues abound worldwide, not only with the drought in Russia and its surrounding region, but in the U.S. where it's been wet in the northern Corn Belt and dry and hot in the Delta and Southwest, said Scott Capinegro, president of Barrington Commodity Brokers in Illinois. There's also flooding in China and Pakistan, he said.
Over in the U.S., there will be an "acreage battle " between wheat, soybeans, corn and cotton, said Capinegro, pointing out that winter wheat acres will be "huge" because of the high price of wheat and lower price for fertilizer.
Then, after the corn and soybean harvest, much of that crop land used for corn and soybeans will be devoted to wheat, he said.
The market already knew it would need 4 million more acres for next year's corn crop based on demand, but with Russia's smaller wheat crop feed usage, much of that demand will move to corn -- then it'll need an additional 4 million to 6 million acres for corn, he said.
http://s.marketwatch.com/public/resources/MWimages/MW-AF807_wheat__ME_20100805195910.jpg
Demand is the bottom line," Capinegro said.
And as incomes rise, so do demands for meat.
"The first thing very poor people do when their income rises is improve their diet," said Tony Sagami, editor of Asia Stock Alert.
"That generally means an increase in the consumption of protein" or meat, he said. The higher consumption "means an increase in the use of feed grain so wheat is one of the brightest futures of all food commodities."
"Third World governments should prepare for food riots and social unrest," he said.
Not quite a crisis
For now, the panic, along with the threat, of a food crisis has subsided.
"The wheat market has made a huge move, but needs another catalyst or issues to develop elsewhere in the world to drive prices higher," said Knuckman.
Prices for wheat have declined in seven out of the last ten sessions as of Thursday.
"The global situation has tightened, but given the abundant stocks situation heading into this marketing year, supplies are not as tight as the $4-plus rally in Chicago [wheat] futures would indicate," said Darin Newsom, senior analyst at Telvent DTN.
Although Black Sea -- Russia, Ukraine, Kazakhstan -- wheat exports are expected to "plummet" 60% on drought-reduced crops, traditional exporters, particularly the U.S., are "holding large supplies that are more than sufficient to compensate for the Black Sea shortfall," the U.S. Department of Agriculture said in a grain market report issued this month.
Russia and the former Soviet Union account for around 15% of world wheat exports, according to Capinegro.
But U.S. ending wheat stocks at 26 million tons are three times larger than just a few years ago, according to the USDA.
"We here in the U.S. have a large wheat supply," Capinegro said. "We won't run out of wheat for our use and export, so the world needs wheat we can supply."
Taking a chance
Even so, the prospects for higher grain prices remain, along with investment opportunity.
"The heart of the matter is that commodities continue to draw in a great deal of investment money, increasing the volatility," said Newsom. "With world stock markets still in a state of flux, long-term investment money has nowhere to go so it migrates to short-term commodities, chasing the latest headlines along the way."
At the same time, "there is not a lot of fat built into the [food supply] system and it remains susceptible to supply-side shocks," said Mayer.
To invest in grains, there is a futures market, exchange-traded funds or stocks tied to grain companies, Newsom said. The ETFs he tracks include the iPath Dow Jones UBS Agriculture Subindex Total Return ETN /quotes/comstock/13*!jja/quotes/nls/jja (JJA 45.88, -0.01, -0.02%) and PowerShares DB Agriculture Fund /quotes/comstock/13*!dba/quotes/nls/dba (DBA 26.17, +0.09, +0.35%) .
"As a longer-term theme for investors, agriculture should be a great place to be," Mayer said. "We have a growing global population out to 2050 and we need to boost food supply by 70% or more, according to the [United Nations]. That will create opportunities for companies in everything from fertilizers to irrigation equipment."
Still Todd Hultman, editor of DailyFutures.com said he'd "hate to buy any grain in the middle of a weather scare."
"The one concern that I have for the grain markets is the effect of a sluggish world economy," he said. "After the weather scare dies down and we see how much grain is available, what will the demand be like?"
http://www.marketwatch.com/story/wheat-crop-scare-rattles-global-nerves-2010-08-20?pagenumber=2