Tuesday, August 03, 2010

Canary in the wheat fields

Our grandchildren and great grandchildren will surely look back on this period of history and ask themselves "What were people thinking? Why didn't they heed the warning signals that Nature was sending (LOUD AND CLEAR) that the climate was changing and threatening to undermine the ecological foundations of society?" (GW)

Global Wheat Shortage Feared as Prices Surge

Wall Street Journal
August 3, 2010

Wheat prices have staged the most drastic rise in more than 50 years, as a drought in Russia fuels growing worries that it could lead to a global shortage of the grain.

Harsh heat and a lack of rain in Russia have killed half of the crop in some hard-hit areas. The slump in production in one of the world's most fertile breadbaskets has pushed prices up 62% since early June, and last month saw the biggest and fastest increase since 1959.

Wheat prices, which briefly rose above $7 a bushel on Monday, are at their highest level since September 2008, the year when low supplies of the grain fueled a global food crisis that led to riots in several countries.

"That's a massive increase in a very short time frame," said Terry Roggensack, an agriculture specialist at the Hightower Report, a Chicago-based commodities firm. "It is a scramble period."

While prices are still well below the levels of 2008 and global stockpiles are much stronger than they were two years ago, the specter of the 2008 shortage looms large, particularly for countries that can't depend on their own production.


This weekend, Egypt, the world's largest wheat importer, bought 180,000 metric tons of wheat, its second purchase in the past two weeks and more than it had initially planned. China is warning local businesses against grain hoarding. In India, officials have allowed once-plentiful stockpiles to rot in fields, leaving many people hungry and driving up local prices.

All are seeking to avoid a repeat of 2008, when Egypt, Haiti and Pakistan were among countries hit by riots over rising food costs. At one point, the World Bank said higher commodity costs had pushed up food prices 83% in three years. Commodity prices plunged amid the darkest days of the financial crisis later that year and in 2009. But even then, some analysts predicted a food crisis would return when the economy recovered.

Russia's troubles are having an even bigger impact in part because many of the world's wheat exporters have experienced some crop problems. Big exporters like Canada have struggled with excessive rains, while Australia has battled locusts. Patches of wheat-growing regions in the European Union also have been struck by drought.

Agency France-Presse/Getty Images

A worker covers wheat sacks at a wholesale grain market in Chandigarh, India, in May.

The problems have caught the global wheat market off-guard. As recently as June, prices were at a nine-month low and down nearly 21% for the year. Now, they are up 28%, though they are still only a little over half the peak in 2008, when prices neared $13 a bushel.

Monday, front-month wheat, for September delivery, closed up 4.8% at $6.9325 a bushel.

In the developed world, the rising prices could pinch food makers, which may hesitate to push the cost to consumers.

"It would likely take greater inflation for these food companies to pass these costs onto their customers," said Andrew Lazar, a Barclays analyst.

The wheat-market drama also is likely to reignite the debate over the role that investors play in the commodities markets. On Monday, the World Bank said speculators may be a short-term driver of volatility in food prices, though it said supply-and-demand fundamentals ultimately triumph. Prices of cocoa, coffee and pork bellies have also recently soared.

In Russia, the fields of the traditionally fertile Volga River region are strewn with withered wheat stalks.

In the worst-hit areas, half of the crop is lost, and surviving plants are expected to yield half as much as in previous years.

Russia and the Ukraine had been expected to supply 18% of the wheat traded internationally.

But the severe weather has curbed those expectations. And some even worry that exports from Russia may shrink to zero, either because of market forces or through government mandate.

The Russian Grain Union now is predicting production this year of 72 million to 78 million metric tons of wheat, as well as some rye, barley and other crops. That is down from 81 million to 85 million tons.

Some say that it is early days and that there will still be plenty of wheat to go around, even with Russia's vastly depleted crop. The U.S. Department of Agriculture recently increased its forecast for the nation's wheat crop. In the U.S., this year's harvest is expected to be strong, thanks to mild weather.

The USDA estimates that there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. By comparison, in 2007-08, U.S. inventories dropped to an all-time low of 8.3 million tons.

AFP/Getty Images

Boys try to save the remains of the harvest in the burnt village of Beloomut, some 130 kilometers from Moscow, on July 31, 2010.

In early July, the U.S. government estimated world supplies at a comfortable 187 million metric tons, well above the 124 million tons produced back in 2007-08, when food riots hit several nations.

Russia's forecast reductions due to the weather would shave roughly 10 million tons off the current total, which "still does not bring us anywhere close to the tightness in world supply that we had in previous years," said Mr. Roggensack.

Back then, the wheat market faced other pressures, as well. The 2007-2008 marketing year was marked by droughts in both Australia and the Black Sea region that were compounded by the U.S.'s shift to corn planting to feed ethanol production.

China's top economic-policy planning agency warned last week that it will bar businesses found guilty of hoarding grains from state grain purchases. The National Development and Reform Commission called for businesses to strictly observe minimum purchase prices.

"Some businesses are blindly 'following the wind' in raising prices," the commission said.

In India, the problem is different. The world's second-largest wheat grower banned exports in 2007 in order to boost local supplies and prices, and stocks are high. Moreover, strong seasonal rains are leading to expectations of a bumper crop. But grains the government stockpiled after last year's drought are being stored under thin plastic sheets, and some is already washing away. The result: The rotting grains have contributed to India's rising food prices. Local wheat prices have risen about 12% to 1,230 rupees ($26.52) per 100 kilograms in the past three months.

"It is gross mismanagement and negligence," says D.H Pai Panandikar, a New Delhi-based economist and president of the RPG Foundation, a think tank. "If only you had handed over the grain to the private sector, not a grain would have been lost. But now, it is nobody's grain."

—Caroline Henshaw, Biman Mukherji and William Mauldin contributed to this article.


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