Why wheat shot up 30% in 3 weeks
21.6.07 | 14:39 By Sarit Menahem
The price of wheat shot up 30% in less than a month, to a 12-year high of around $420 to around $600 for 5,000 bushels. Now, wheat is a main component of the cost of flour (90% in Israel). Therefore the spike in its price means that the cost of bread is about to rise.
In Israel, the prices of basic breads are regulated by the Ministry of Industry and Trade. But you can expect the price of bakery or specialty breads to climb, and by a lot, to compensate for losses on regulated bread.
The spike in wheat is a hot-button topic on the global agenda. What happened?
Experts say that the global stockpile of wheat has fallen to its lowest level in 26 years. Global warming is changing weather patterns. Harvests are down and in parallel, the explosive economic growth in China has increased consumption of "western items", and guess what, that includes wheat.
Some also blame speculators, hedge funds specifically, for increasing the volatility of commodity futures.
Bad weather
When it comes to agricultural commodities, you can't ignore the effect of global warming. The weather is changing. Floods and droughts are not good for crops.
The U.S. is the biggest wheat exporter and its main cultivation areas are Kansas and Oklahoma.
"The last winter was a terrible one. The ground froze. A week ago the region was swept by rainstorms that turned the ground muddy and impossible to harvest," describes Ron Eichel, the chief international markets strategist at Israel Brokerage & Investments. It's still raining, too and the crops are rotting. Only 9% of the crop is rated as being in excellent condition, the Kansas Agricultural Statistics Service said this week, adding that 37% is in horrible condition.
The American agricultural authorities say that by June 10, Oklahoman farmers had harvested only 25% of the season's production, compared with 76% in the previous year, Eichel says. The average over five years is 45%.
Kansas is in even sorrier state, having harvested only 1% of the crop compared with 13% in the same period of 2006. Why? Because of the unforgiving ground conditions, and the pace at which the wheat is ripening, Eichel explains.
Looking elsewhere, forecasts of a benign winter in Australia were dashed as a drought dried up vast tracts of land, including wheat fields. South-east Asian countries also reported that their wheat crops would be smaller than usual this year.
As for China, not only are tastes westernizing, but it's undergoing a process of urbanization, which is reducing the agricultural sector. China had been practically self-sufficient, says Gideon Ben-Noon, CEO of the Shekel Group. Demand has risen while internal supply has dwindled, forcing China to import agricultural products.
"The problem is that China does not reveal its stockpile of commodities," Ben-Noon says, charging that there have been past discrepancies between China's actual reserves and what it said it has. And Chinese imports have also boosted the price of wheat.
Wheat suffers from ethanol craze
Meanwhile, seeing peak oil either coming, here or already past, the world is hungrily eyeing ethanol as a future source of energy. Ethanol is prepared mainly from cane sugar, soy beans and corn. Thing is, that as the demand for ethanol soars, more land is devoted to growing those three at the expense of other staples, such as - yes, wheat.
Also, as corn disappears from the table in favor of the car, people eat more wheat, again jacking up the price.
The futures market is rife with speculators moving the prices. "If they believe that the price of a certain product will increase, they stock up on futures and the price rises even more," says Ben-Noon. "Each season the farmers decide anew what they will grow. If they see that corn has risen, they'll sow corn at the expense of other things."
In Europe, ethanol isn't the thing, it's biodiesel. What's that? That's gasoline enriched with agricultural oils, derived from soy beans, coconuts, corn - and wheat.
"One of the main reasons that investment managers also trade in commodity futures is the positive correlation with inflationary pressure," adds Roy Regev, chairman of KSM ETFs. An investor buying futures is hedging against rising prices.
But Regev doesn't think that the spike in wheat must necessarily boost inflation. There's no telling; sometimes commodities soar in price, notably oil, without affecting the general index of prices, he points out.
Why? Cheap labor in the east, which continues to churn out cheap products despite the rise in oil.
But - you can't rehabilitate a crop that's been stunted and finally dehydrated by drought to death. It's gone and that means the product will be scarcer and more expensive, Eichel draws the bottom line. But that doesn't have to mean that prices in Israel will increase in any general way, he reassures. Agricultural commodities don't have much impact on the general business sector in the west. Most companies won't be raising their prices. But you can bet that the neighborhood baker will.
haaretz.com |
