Wednesday, February 06, 2008

Food Shortages?

Talk about a strange election year, there have been whispers in the Chicago Board of Trade's grain room for some time concerning the levels of grain stocks going into next fall's harvest. Things are tight across the board this year but the hard red spring wheat market, traded at the Minneapolis Grain Exchange, is out of control. Hard red spring wheat is used to produce pasta. Wheat markets were bid up the 30 cent per bushel limit all day however the option markets allow strategies to discover price "synthetically". I heard that on a synthetic basis the wheat market in Minneapolis traded over $18 a bushel this morning, an unheard of price. Before this year the wheat market in Chicago had a record price (going back to 1848) of $7.50 a bushel, reached in highly unusual trade (a reader is quoted in the linked NY Times article!) literally during the last few seconds of trade in the March 1996 contract. Those involved in the trade were disciplined by the feds. Today the March wheat contract was bid the exchange imposed daily limit of 30 cents per bushel at $10.33 per bushel and traded synthetically as high as $10.90 per bushel before easing from those lofty levels.

The grain markets are going through some of the same issues that the oil markets have been going through, notably expanding demand. As the world gets more wealthy people want better foods, be it meat, bread, pasta, etc. A constant in the grain markets is the effect of weather, last season's and of course the upcoming season's weather. Other parts of the world have been hard hit by weather issues during the past few years, especially historic wheat exporter Australia which has been stricken by a drought that has seemed to have allieviated during the past several months. The other issue is ethanol, sure we are exporting historic amounts of corn but today we also have the additional and less elastic demand for corn from the ethanol makers, they can often outbid livestock raisers for feed stock. Today corn prices hit another record high of $5.28 3/4 per bushel before closing lower on fresh farmer selling of corn that they had from last year and previous harvests.

As we prepare for next summer's political conventions we could very well find ourselves with grain stocks at critically low levels, we may literally be scraping the bottom of the barrel before the next harvest. Nearly every year there is a "weather scare" of one sort or another but if there is a serious weather issue (read: drought) we will experience grain shortages that could lead to food shortages. Shortages or the appearance of shortages will surely become political issues during this political year. Flex-fuel or hot dogs? Remember that political do-gooders made that decision for you years ago.

Check out this Flying Debris post from last October: World's Great Minds Look at Ag Issues

This post in no way advocates the taking of any position in any cash, future or option market.

Many Thanks to Dr. Sanity for inclusion in her Carnival of Insanities again this week. Btw, I was told that wheat in Minneapolis traded over $21 per bushel synthetically last Friday. If you have a favorite pasta that is storable or a favorite flour to make your own pasta, go out and stock up - today!

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Blogger Publia said...

I thought of sending you those wheat smuggling emails (seriously) that I got from the sub continent a couple of weeks ago, but decided you wouldn't be interested. I should have sent them along!

Why can't we put more acres in wheat? It's only planning time down on the farm, and planting is not any time soon. Aren't we still paying farmers NOT to plant? It would be interesting if you educated us a bit on this.

9:17 PM  
Anonymous mpw280 said...

Wheat is either a spring or fall planted crop. There were reported shortages of wheat seed to be planted last fall, though I don't know if that will carry through to spring planted wheat or not. There is competition to think of as well, is it more profitable to grow corn, soybeans, wheat cotton, rice, which affects your bottom line the most? There are also local considerations, are you geared up to grow certain crops, do you have access to storage and shipping for particular crops, is there a local market for a particular crop (think corn and ethanol plants), what is your current crop rotation and what is your base for your USDA crop subsidy? All those variables and a few dozen more come into the equation as to what to plant and when. MPW280

11:12 PM  

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