Wheat Stories Hitting Both Wall Street Journal and New York Times Today

As always, we are early here... but by being early we can make some profits before news hits the main media outlets. We have some interesting news today, especially in the Wall Street Journal. Since the fall I've been following the food producers closely, mostly to see how much of the food inflation they are passing on to consumers. I was interested in Smithfield Foods (SFD) as a hog producer with potential to export to China but backed off when it was apparent all these companies gross margins are going to be trashed as their input costs went through the roof. This has borne true across the food chain (pun intended). Now these food companies are fighting back and as is the American way, crying their way to Washington for "relief". One solution? Restricting exports. The same exports that the rest of the world is desperate for. Remember, food is one of the things we actually export nowadays....

As I've stated, we are heading for a World of Shortages... and I expect cross border strife among countries to expand over the coming decade. Countries with resources will begin to horde their own under pressure from their populaces and "take care of their own". You are just seeing the top of the first inning in this, both in this story and others I have highlighted over the past few months. These measures will in most part fail now, but over the next 5-20 years, they will come to fruition and I see a heavy rise in protectionism.

• With the price of wheat and other grains soaring, food producers are calling on the government to help farmers ratchet up output.
• Some are calling for loosening a federal conservation program that compensates growers for leaving fields fallow. Others are calling for restrictions on exports, an effort that's unlikely to gain traction but that illustrates the depth of their concerns.
• So far, the government is resisting, but the growing chorus for government action signals a new phase in a long-term shift in the global grain markets. For years, U.S. farmers have groused about low prices brought on by overproduction. Now, surging demand from emerging nations and the biofuels industry have sent prices sharply higher.
• Meanwhile, the baking industry's lobbying group, representing giants like Sara Lee Corp., Kellogg Co. and Interstate Bakeries Corp., plans to gather food-company employees as well as smaller bakers for a march on Washington next month to lobby for reduced wheat exports and to loosen the conservation program.
• Whether supplies meet such dire predictions depends on conditions in the U.S. and elsewhere. Key wheat-producing nations such Australia and Ukraine have had poor growing seasons. Global wheat stocks are at their lowest level in 30 years, while U.S. wheat stocks are the lowest they've been in 60 years, according to the USDA. Hard red spring wheat, the high-protein variety used to make high-quality bread and pizza crust, among other things, is the scarcest of all.
• Millers and bakers might have to put up with high prices for only another three to five months; by then, the U.S. spring wheat crop will have been harvested and world wheat production is expected to increase, says Dan Basse, president of AgResource, an agriculture-research company in Chicago. After that, the price could soften. However, if there's a drought, the already-low grain reserves could go even lower, pushing prices even higher for a more protracted period.
• Over the past year, corn and soybean prices hit records. Now, wheat prices are on a tear. On the Minneapolis Grain Exchange, hard red spring wheat closed at $17.63 a bushel yesterday, up from $4.92 a year earlier. In the cash markets, some farmers are fetching more than $20 a bushel. Many farmers are sitting on their grain, waiting for the price to go even higher, exacerbating the jump in prices.
• Wheat prices have risen so swiftly that bakers can't adjust their prices fast enough to offset the impact, said Len Amoroso, executive vice president of Amoroso's Baking Co. in Philadelphia. "We are talking about prices that are just unheard of," he said. Tuesday, Mr. Amoroso said, he was quoted $48 per 100 pounds of flour from hard red spring wheat, which he uses to make sandwich rolls and other products. A year ago, he paid about $14.60.
• Whether Washington acts may depend on how much consumers are affected. Already, prices have risen for everything from steak to pasta. Food prices rose about 5% in the U.S. last year, the highest rate since 1990, while overall inflation rose by about 4%. Some analysts expect food inflation to rise faster this year.
• The average retail price for whole-wheat bread rose 12% to $1.78 per pound in November from a year earlier. Last month, food giants Kraft Foods Inc. and Kellogg said fourth-quarter profits declined because of higher ingredient costs.
• Mr. MacKie and other bakers are asking the Agriculture Department to curtail wheat exports until there's a guaranteed supply at home. They cite export tariffs in Russia and China, which have supply concerns. Wheat exports from July to December of last year were 74% higher than they were in the same period the previous year, and they're expected to run strong in coming months, the USDA says.
• Restrictions on exports are unlikely because of opposition from farm groups and U.S. trading partners. Such a move would be a throw back to the 1980s, when President Carter imposed an embargo on U.S. grain shipments to the Soviet Union, a move that was unpopular with U.S. farmers.
• Brian Leier, a 35-year-old grain farmer in Linton, N.D., said he favors freeing up land that has been idled for conservation. "It's either we release some CRP acres or there are going to be plenty of people starving around the world, I believe," Mr. Leier said.

From the NY Times "In Price and Supply, Wheat is the Unstable Staple"

• For decades, wheat was a commodity no American needed to think much about, except the farmers who grew it. The grain was usually plentiful and prices were low.
• All of a sudden, those assumptions have been turned upside down. With demand soaring abroad and droughts crimping supply, the world’s wheat stockpiles have fallen to their lowest level in 30 years, and stocks in the United States have dropped to levels unseen since 1948.
• Prices for common wheat are up nearly 50 percent since August, and they are up even more for the most sought-after varieties, leaving buyers, growers and longtime commodity traders shaking their heads.
• “Anyone who tells you they’ve seen something like this is a liar,” said Vince Boddicker of the Farmers Trading Company in Mitchell, S.D.
• Though this week’s prices were nominal records, the inflation-adjusted record for wheat was set in the mid-1970s, when it exceeded $20 a bushel in today’s dollars after huge sales to the Soviet Union.
• Foreign buying is driving this market, too, but these buyers include South Korea, Taiwan, Mexico, Nigeria and Venezuela. Economic growth abroad has given people the means to improve their diets, and they are developing a taste for products made from wheat.
• “We haven’t hit a price that has slowed the international interest,” said Joe Victor of the commodity research firm Allendale. “That is something that definitely has the market excited.”
• In a Jan. 30 conference call, the chief executive of Kellogg, A. D. David Mackay, said, “Everyone is feeling these inflationary pressures.” General Mills cited rising ingredient costs when it increased cereal prices last June.
• The United States Department of Agriculture’s 10-year forecast, released Tuesday, sees the wheat shortage as temporary. Stockpiles were predicted to fall this year to 312 million bushels, from 456 million bushels, before rebounding to about 700 million bushels by the end of the decade.

Again, my theory is we have rotating crop production - whatever is the highest one year, the next season will get flooded with new plantings. Why is there a wheat shortage now? Corn is everywhere due to the corn ethanol boondoggle. Next year? We will have a ton of wheat planted... causing issues with corn or sobyeans or (insert next shortage here!).

Even in my local paper I saw an article last night - amazingly MARKET FORCES work. Farmers respond to this gold rush the world over. The problem? Deforestation of the Brazilian rain forest is increasing rapidly to clear land for crops. Only exaggerating global climate change. 'Deforestation Surge Confounds Brazil'

• As deforestation in Brazil's Amazon rain forest declined during the past three years, the country's leaders crowed that they had found the recipe for stopping the destruction of the world's most diverse ecosystem. By expanding the area of protected rain forest by more than 60% while allowing controlled logging, Brazil's government said it had cracked down on the illegal clearing that has consumed a fifth of the rain forest.
• The celebration ended cold last month, however, when satellite images revealed that deforestation had exploded late last year in areas that regulators thought were under control.
• As much as 2,700 square miles of the forest were cleared during the last five months of 2007, an area bigger than Delaware and equal to more than 60% of the total deforestation registered over the previous 12 months.
• Even more worrisome, the deforestation intensified in November and December, a period usually marked by heavy rains and a drop in forest clearing.
• The nation's environment minister, Marina Silva, has blamed agriculture for the spike in deforestation and challenged farmers to halt all jungle clearing.
• Brazil is the world's fourth-biggest emitter of global-warming gases, almost solely on the strength of emissions from deforestation, according to the World Resources Institute in Washington, D.C.
• "This demonstrates that the government has less control than they realized," said Thomas Lovejoy, president of the H. John Heinz III Center for Science, Economics and the Environment in Washington. "They underestimated the market forces and overestimated the effectiveness of enforcement."
• Critics ranging from environmentalists to ranchers said regulators couldn't monitor a wilderness the size of the western United States, especially as the prices of soybeans, beef and other commodities produced on cleared forest land rose.
• "The government took some good actions, but the economics have more power," he said.

Again, it is a big big world out there - and our American centric way of life here really clouds us to what is going out there in the globe. What is fascinating from an economic point of view is how all these market forces are intermingled and 1 drip in the middle of a vast ocean leads to many many consequences the world over. I don't blame these Brazilian farmers - they see a market opportunity and are doing what humans the world over would do in the exact same situation. As prices continue to rise and shortages continue to grow, I expect to see more of the same.

And this is why I do believe the agriculture bull is where the oil bull was around 2003-2004. And why continued exposure to fertilizers and crop futures will remain part of the portfolio for a long while.

Long Powershares DB Agriculture Fund and a lot of fertilizer in fund and in personal account