Wheat Prices Hit Record Highs
something's going on in here
By blackhedd Posted in agriculture | Economy | Food | Wheat — Comments (34) / Email this page » / Leave a comment »
As I was doing my post-market data scan on Monday afternoon, I stopped short to notice what had happened in trading of wheat futures on exchanges in the Midwest. In after-hours trading in Chicago, Minneapolis and Kansas City (where different varieties of wheat trade), prices were limit-up across the board. Some contracts were up 8 percent on the day.
Most wheat varieties have been going for about $10 a bushel, give or take, in recent weeks. Today in Minneapolis, hard-red spring wheat for March delivery traded at nearly $25 a bushel. This contract was going for $8 three months ago.
(March is the front-month, so there's no daily limit on its price movements. A bushel of wheat or soybeans is 60 pounds. A bushel of corn is 56 pounds.)
This is totally wicked market action in a commodity that a year ago was trading for roughly half the price it is now. As I mentioned in a brief RedHot the other night, food prices will be the major wild card, or uncertain factor, in the global economy this year, and well worth your attention.
Keep reading...
As I write this (about 3am EST on 26 February), wheat prices in Asian markets are sharply higher again. Corn and soybeans are sharply lower, but higher than they were earlier in the session.
I couldn't get any skinny by calling around after US markets closed on Monday. There was no evident news to explain the action in the wheat market. Then I noticed this news story, filed from Singapore.
The Bloomberg reporter on the story blames concerns about supply for the much higher prices. And the factor that most influences wheat supplies is the weather.
It turns out that we had some unusually dry weather in many wheat-growing regions around the world last year. (This isn't a new story, and you've probably heard it here and there without paying much attention.) These regions include Canada, the upper Midwest, India, Australia, China, Argentina, Pakistan, and Kazakhstan.
The weather has had the effect of reducing global supplies of wheat to levels not seen in decades. That increases prices (and reduces profits) for everyone that uses wheat, in products from bread, cake and cookies to noodles and pasta.
You've probably seen another effect related to high grain prices: many countries, including China and Kazakhstan, have been adding export tariffs to keep their farmers from exporting wheat and other grains. This is an attempt to stem high food prices in those countries. I don't need to tell you that the Chinese government in particular is deeply frightened by high food prices, which historically have a nasty tendency to cause revolutions in that country.
I'm not an expert in agricultural production. My research suggests that there will be a lot of pressure on US farmers during 2008 to increase acreage of all major grain and oilseed products, to make up for the shortfall caused by last year's weather. And that they will be hard-pressed to meet the demand, even assuming good weather.
The Department of Agriculture reported that planting of winter wheat in the Midwest increased by about 3 percent. If the weather is good, this should have the effect of moderating wheat prices by springtime, and indeed futures markets seem to bear out this expectation. Any adverse change in current weather conditions (meaning, not enough rainfall at the critical points in the growing season) will make things much worse.
Prices for ethanol have also turned up in recent weeks, reversing last year's downward trend, and probably in sympathy with higher crude oil prices. This should add to the production of corn, which is also at very high prices (over $5 a bushel right now), and reduce production of soybeans in 2008. (Corn and sorghum are used primarily to feed livestock.) It's not clear to me that there is much of a substitution effect between wheat acreage and corn acreage. Hopefully some of you readers will have the expertise to add more color to this in the comments.
So although production is expected to increase this year, it may not have much of a moderating impact on prices.
And by the way, you may be under the impression that we're talking about a very large business here. From my back-of-the-envelope calculations, the US will produce something like $30 billion worth of wheat this year, nearly half of which will be exported. (Obviously this is an order-of-magnitude calculation, given how volatile prices have been.) That's two-tenths of one percent of the US economy. Add in corn, soybeans, sorghum, and all the rest, and you get something like a $200 billion grain and oilseed economy. Not really all that big.
The Department of Agriculture's budget for subsidies alone is about $90 billion. That's remarkable. You might even say that the government provides nearly all of the earnings of grain producers. The word "subsidy" may not even begin to describe what's going on here. But that's a discussion for another day.
Bottom line, this will be a very challenging year for food prices around the world. And food is of course the most basic and important thing that economic activity produces. High prices and food shortages are just about the easiest way to destabilize a society, as history has shown time and again. Keep your eyes on this.
Wheat Prices Hit Record Highs 34 Comments (0 topical, 34 editorial, 0 hidden) Post a comment »
It's true that grain prices in the 1970s were higher on an inflation-adjusted basis than they are now. It's also true that the Russians had a lot trouble feeding themselves and imported a lot of grain from us, just as the Indians did in the mid-1960s. (Today, the Russians and the Chinese are putting tariffs on exports to keep the grain at home.)
It's also true that in the 1970s, crude oil prices were at historic highs and this damaged economic performance around the world. Today, economic performance around the world is being damaged by a persistent credit crisis that is stubbornly unresponsive to cuts in interest rates. And crude oil prices are again at historic highs.
Meanwhile, the same cuts in interest rates have had the effect of exporting high monetary inflation to every country in the world with either export or currency sensitivity to the US. The result is that they have the cash to bid up grain prices without sustaining the reduction in demand that you would ordinarily expect.
That's a lot of disruptions to be happening all at once.
The result in the 1970s was a mysterious and painful evil called "stagflation." I'm glad you made the connection to that decade, because it's possible that we're heading for a similar place.
Do American farmers have enough spare acreage now to meet the rising demand from the emerging world, which is now far greater than it was in the 1970s?
As a rule, free markets operate with enough flexibility to match supply with demand, even if there is a lag time. Another of my concerns is that agriculture is heavily regulated everywhere in the world, and it may have less flexibility than we think.
I've also heard rumors that the US government is thinking about stepping in to intervene in the grain markets.
The consumer is a wild card. Everywhere you go, you hear grumbling about the price of milk (which has more than doubled, to $4.50/gal where I live), bread, and other staples. I suspect that there is far more than enough slack in US consumers' budgets to afford the price increases. Just as with gasoline, Americans will complain loudly, but have no real trouble paying up.
I am, however, concerned about the potential for social unrest in China, where cooking oil (usually soy or palm oil) prices have been brought under government control. And you know that price controls generally lead to shortages.
DO you think efforts by environmental groups to prevent the widespread use of genetic engineering to improve crop yields has had an adverse effect on food availability?
It may not have done so yet, because the technologies are not necessarily mature. However, if you've ever seen some of the computational technology and know-how being generated by modern university ag Schools, we may be on the cusp of a seceond agricultural revolution. Assumning, of course, that political advocacy doesn't strangle that revolution in its crib.
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
From what I know, the phobia over "Frankenfood" is much greater in Europe (the land of small farms) than it is here. But I think you're right about the prospects for a new Green Revolution from genetic engineering.
I'd be more concerned about government management of the ag business as a factor depressing productivity growth than environmental groups, however. Besides, the enviros have their hands full with their first priority: making sure that everyone else in the world has more petroleum than we do.
There are quite a few GM crops planted in the US. Of course export is still an issue, mostly to Europe. Then you have the organic movement, which goes the other way... reducing yields. I'm not sure where that is headed.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
If we really wanted to, this would be an opportunity for the US, Canada and Argentina to absolutely make a killing. We just need to cartelize our wheat production, and do to OPEC what OPEC does to us. Australia could probably produce enough to play as well.
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
blackhedd, I am in the provisions business, supplying the food industry. We have been told at several conferences that there is an immediate 30% price jump about to hit your local grocery store in the next 2 months or so...
Couple that with rising gas prices and another new jump in forclosures....blammmmmm
A government big enough to give you everything you want is strong enough to take everything you have - Thomas Jefferson
...that you live in now. On a visit back there last summer, I was surprised to find that farmers were tickled pink to be seeing the first "sticky" price increases they had had in ten years. That's when I started smelling something funny.
You mention a 30% increase in two months, but you don't say of what. Products made with wheat? Futures markets are predicting that the worst of the price spike will show up in the March timeframe, with prices high but not as high for May and beyond.
And does anyone here have the expertise to say whether corn and wheat acreage are readily interchangeable? I'm no expert, but as far as I can tell the required weather patterns and fertilizer inputs are different. A acre of corn seems to produce about three times as many bushels as an acre of wheat (adjusting for the smaller bushel size used with corn), so I'd roughly expect an equilibration to take place with the wheat bushel price around three times that of corn minus 10%, so roughly $13.50. That's about the current level of the May futures.
Over the last couple of decades, many farmers have gotten away from livestock (dairy or beef) and no longer have the equipment to plant small grain. They can interchange corn and soybean acreages, but not so much for small grain. Talking to farmers, I also get the impression that they feel less confident that the wheat prices will remain high than for corn or beans, once the harvests start to come in. Right now, farmers have no wheat to sell, so the market prices don't really mean much to the growers.
The break even point for corn and wheat is probably closer to a factor of two in price, since corn requires considerably more cultivation/weed control and fertilizer than wheat.
Last year, with wheat prices quite a bit lower than this year, the folks I know who planted wheat did pretty well. They will likely plant at least as much wheat this year, but I don't see much change in the guys that run the big corn and soybean acreages.
But I have a couple of uncles who still run a dairy operation in western Minnesota. I tend to spend quite a bit of time out there in the summer; back to the land and all that.
And does anyone here have the expertise to say whether corn and wheat acreage are readily interchangeable?
I don't have "expertise" but I do work in the county extension office.;o) At least in my part of the country, wheat and corn acreage is not interchangeable. Wheat is being planted now and will be harvested in time to follow it with cotton. According to all of the government programs and deadlines, corn will already be in the ground. While the wheat production in our county has gone up for the past 5 years because growers can follow it with another crop thus doubling the use of the land, growers are increasingly moving their acreage to corn because of the increasing demand for corn and the higher prices that they are seeing. The lure of ethanol is causing feed prices to go up right now and I expect that it won't be long before that is reflected in the grocery aisles. Diverting a large portion of our food corn to ethanol manufacture is a disturbing thought. It would be different if we were adding the corn acreage just for ethanol.
Anyway, like I said, I have no expertise. I just listen to the farmers as they come into the office and discuss with the ag agent.
And that is an important point... corn has much tougher weather and soil requirements than wheat. There are varieties of wheat you can even grow in the winter, as you mention. There are also a lot of places you can't grown corn with acceptable yields at all, but can still grow wheat.
Wheat has historically not been much of a money maker, so ethanol or no ethanol, given conditions good for growing corn, farmers would plant corn over wheat every time. I really don't think you can pin high wheat prices on ethanol.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
I was pointing out that the trend in our county has been to planting more acreage in wheat because of the ability to then replant with another crop. But that trend seems to be slowing and moving toward just planting corn (although the drought caused quite a concern for corn yield last year.)
So, I guess, in a round-about way, you could say that ethanol does effect the price of wheat if the move from wheat acreage to corn acreage causes the supply of wheat to decrease. In our county that is a stretch since we are not huge producers of wheat even with the steady growth that we had been experiencing.
Sorry that my first post wasn't clear and I hope that this one helped clear up my point.
The CEO of Smithfield, the largest producer of pork and pork products in the USA, says they are seeing raw material increases they have never seen before.
They are saying all comodities, all, will go up creating an average increase of 30%.
What bothers me about all of this, is that the powers to be seem to make what ever they predict happen, whether it actually happens or not!
A government big enough to give you everything you want is strong enough to take everything you have - Thomas Jefferson
Blackhedd, a couple comments on the commodity prices. The first consideration is this: in the areas outlying the Corn Belt (IA, IL, IN), the switch seen last year to corn acres is rolling back to wheat, milo, soybeans or cotton. Soybean seed is nigh-impossible to come by, and what is available is generally 70-85% germ (a low-quality seed). In many areas, including Indiana, Arkansas and Missouri, soybean seed is wholly unavailable. Soybeans are an attractive rotation crop because they are nutrient-dense once plowed under, infrastructure requirements are much less (storage, trucking, etc.) and bean prices nearing $14 cash for harvest delivery are highly attractive to guys with marginal ground unable to support 200 bushel corn.
So, with winter wheat seeded into a huge number of acres for summer harvest, why are the Minneapolis and Chicago wheat contracts continuing their impressive run? A few issues - many wheat growing areas are seeing substantial cold snaps, and there is a lingering fear of spring freezing after the wheat re-emerges from its winter slumber. Secondly, the La Nina weather pattern is showing unusual strength for this late in its cycle, and no one is sure yet if it will cause a droughty summer, or give way to El Nino and start a wetter summer phase through 2010 (good for yield, typically detrimental to quality). The last factor is politics: the newly-signed Energy bill has boosted demand for ethanol and bio-diesel, and the unfinished Farm Bill is making a lot people in production agriculture squeamish.
The end result will likely be thus: corn loses about 3 million acres, soybeans pick up 6-7 million acres, and harvested wheat comes out strong. Farmers are holding their supplies right now, as well, leading to a firmer basis, weakening barge freight, and tighter supplies driving prices higher. Ultimately, there should be a threshold event, and farmers will release their grain, stabilizing prices. Good lord, it is hard to do a brief synopsis on agriculture. Too many dynamics in play, any of which I'd address at length, except the other commenters might hurt me :)
I love learning all this technical dope about specific markets. (Just don't get me started on the bond market or technology venture capital, or I'll bore you to tears.)
I have been hearing about the move from corn into beans and the extreme shortages in the latter. Thanks for confirming it. Can you confirm that acreage planted in winter wheat is up about 3% from last year?
Another thing that I'm realizing is that there are plenty of people out there in the Midwest that had pretty much nailed how this month was going to go, back in December.
Blackhedd, according to the USDA's NASS (Nat'l Agriculture Statistics Service) winter wheat seedings were up 4% for the 2007-2008 crop year. With such volatile wheat prices, it's not out of bounds to expect a further switch to spring wheat, especially in the Upper Plains states where corn is a marginal proposition at best. Also, there is an upward-scaling niche market in strawboard manufacturing in the Dakotas, and that wheat straw is perfect for that. Probably a fringe consideration at best, but an interesting local dynamic in many places. As to your statement that Midwestern commenters nailed it in December, many in the trade were predicting this during this time last year. However, the acceleration of the demand vis-a-vis international meat and grain demand has caught nearly everyone off-guard. Right now, there is a scary amount of dynamics coalescing into a perfect storm of commodity valuation and uncertainty.
Can you say ethanol? Too much production of corn is hurting other food production. This was a terrible decision by the government.
Inflation? If all are rising, a sure sign.
the equilibrium with their food edicts. I hear that Mayor Bloomberg is considering making the consumption of bread a felony. (But when you corner the market, I hope you will give us little people on RS a membership discount, right?)
Seriously, it is time for the NYC-DC power elite to try to transcend their yuppie bubble to see what's going on in the real world. Food prices matter, electorally and politically and in revolutions. Bread riots were a catalyst for 1789.
Timely article. Thanks.
Even if Bloomberg allows his supervised citizens to return to filling up on transfats and curbing their appetites with cigarettes, I doubt this will help much.
What else should he, or the other wizards, do?
...and triple-overpay for everything we eat anyway.
I personally know some people who run organic farms outside of DC. This is the most inefficient kind of agriculture you can possibly imagine. They probably couldn't waste money any faster if they burned $20 bills in smudgepots.
And yet the denizens of DC hustle out to Northern Virginia every week to get fleeced buy food from them.
Affluent people will pay a lot of extra money in return for illusory moral victories.
I have no doubt that you are correct that some percentage of buyers feel better about purchasing organic foods because they think it helps the planet or something.
However, in my experience, those who buy organic fruits and vegetables due so mainly because they wish to forgo any potential adverse effects of pesticides and artificial fertilizers and/or support small farmers. I have no idea how helpful small farmers find this, but the extra cost probably doesn't hurt them even with the reduced yield. I'm not sure just how much of a health benefit this is for most people either, but given that a number of pesticides did turn out to later be found harmful and were banned it's not an unreasonable position to error on the side of caution if you can afford it.
With regards to "organic" milk or those from rBST free cows I think there is some real merit here though. It became FDA approved in 1993 and we are the only country in the world where it's legal to use the recombinant hormone. If the effects take years to become noticeable which would be quite common if early use side-effects didn't show up until puberty or say mid-30s in women with increased breast cancer rates or something we couldn't know about it yet if the percentage of people adversely effected were small.
As a side note, to get the approval date I referenced above I checked wikipedia and found this nugget: "Several scientists involved in the review of Posilac were dismissed or pressured to leave the FDA". Don't know anything about that, but it's never a good sign when the only country where it's legal also might have had some funny business to get that approval. Today the drug is used in 1/3 of all US milk cows although concern about it has resulted in Safeway, Krogers, Publix, Starbucks, etc declaring they will avoid dairy farms that use the artificial growth hormone.
have now entered the financial market!
http://www.krogerpersonalfinance.com/
A government big enough to give you everything you want is strong enough to take everything you have - Thomas Jefferson
in statecraft. For example, a few discrete signals to the Chinese that we know we have the grains and we know that they need them might smooth a few issues over.
As far as Mayor Bloomberg, he should shut the Earth Control Clinic down. And then do nothing.
Maybe as a political strategy, to calm the masses, the price of bread and milk should be kept easily affordable. But I don't think it's good policy.
We have no idea if the rise of food prices will be catastrophic in any civilization-destroying sense of catastrophe. The world's population may decrease to match availability of food supplies. Or agri-technologies may meet the challenge to feed another 10+ billion people.
I don't see a catastrophe either way, just adjustment.
Minneapolis soft-red winter wheat for March delivery is down slightly from its crazy $24 close yesterday. Nearly everything else is limit-up. The Chicago and Kansas City May contracts are up their limit of 90 cents.
Something is definitely going on.
Just markets doing their thing. The daily limits on the non-front-month contracts spread the action out over multiple days.
Flyover - Thanks for the factual input. Any idea if there is discussion about bring acres out of reserve/ long term set aside ?
Gore /Browner finished us a full time dairy and I have not had the time to track all that noise since..... teenagers and a"real" job .
Yil - Re: Safety -
OK I am not trying to be rude but what are you smoking?
Modern crop protectants - "pesticides" in "Green" speak are found rarely in detectable levels in US produced food. The level of protections are between several thousand and several million in terms of doasge. Dosage makes a poison . Selenium - a chemical cousin of arsenic - was long thought to be a similar toxin and banned under the old regs. Actually selenium is a necessary trace mineral and once added to human and livestock diets we have seen a number of health issues diminish.
WE now have the technology to find to find a compound down to parts per quadrillion(sp?) and no I don't know how many zeros that is but it is a bunch !
Finding any given compound does NOT a toxin make .
Now as for the rBST NONSENSE
UM.... there is no test to determine rBST milk from NON rBST milk because they are IDENTICAL ! AS for taking" thirty years for the side effect to show up" .... side effects from what ?
In a general sense do you ever go to the Doc ??? Which modern chemistry do reject ? The chemistry of modern medicine or just the chemistry of modern agriculture ? The plague is natural along with a host of other nasty illnesses and if you want to go back to raising food with a hoe be my guest. The rest of humanity has and will continue to use our God given intellect to more forward .
The CRP program requires a 10-15 year commitment on the part of the landowner. So if they are in CRP now it might be a while before they could take it out in response to higher commodity prices. That (and equiv state programs) account for probably just about all the decent land that you will see just sitting idle. Even if a farmer doesn't have any interest in farming his own land, because he's retired, he rents it out to people who will... so there isn't really that much idle land suitable for growing crops.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
Thanks Zuiko - I was just thinking outloud - and yes, that is dangerous in my case .
I did not remember whether we were coming up on some rollout dates . We never had any land that we could afford to idle in that we had bovines .
It talks specifically about current reenrollment trends in the CRP program.
An estimated 4.6 million acres in CRP contracts will exit CRP between 2007 and 2010. Of the 4.6 million acres, approximately 1.4 million acres are located in major corn producing states.
"The percentage of landowners choosing to remain in CRP is consistent with what we have seen in the past, despite speculation that re-enrollment would drop significantly due to high corn prices," said Johanns.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
Yes, things are a changing.... they always do .
The current market scene has some basic similarities to what is known as "the oil bubble" in grain markets in the 1970 s .
The world marched forward out of that "crisis" and US production agriculture just keeps over producing and driving long term prices back to historic norms... . What will occur after this spike - like all others in the past is what is called a "long market tail ." Acreages will get adjusted to respond to the market and prices will drift back toward normal .
The hand ringing and "the sky is falling" memes are NOT productive nor historically supported.
NOT famine, nor economic collapse, nor even "destabilization" are "just around the corner."
I know it doesn't sell well in the NON-FARM media but the folks who get the job done - farming- from coast to coast border to border here in the US are not and never have been the 'Green Acre' types .
AS for the Feds and the ag programs yes, they are not rational and yes, they need to be reformed and retooled and yes, that is a factual statement on about 85% of what happens in DC !