Tuesday, August 3, 2010

Wheat Continues to Surge as Russian Droughts Drive Prices

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Two and a half weeks ago I mentioned that wheat was flying [July 16, 2010: Get Your Wheat On]  This subindex below was priced at just over $20.  Yesterday it was actually making a run for $25, and well into the $24s, tacking on another 20% in just the past few weeks.

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I listed some ETFs that would benefit in the July piece but in theory as prices for crops go up, farmers should be willing to open up the pocketbooks for fertilizer, so that's an easier second derivative play on this move.  Aside from the devastation in Russia, it appears there are even issues in Canada.

  • Wheat prices opened August with another big jump, hitting a 2-year high Monday as worsening weather conditions ravaged Russia's grain crops.  Wheat prices soared 42% in July, the biggest monthly gain in at least 51 years, as a severe Russian drought destroyed one-fifth of Russia's wheat crop. Fires are now raging in the fields of the world's No. 3 wheat exporter, hurting more crops and increasing expectations that Russia will have to curb or even stop its exports.>
  • Estimates from Russian grain growers' unions and economists range from a 30 to 44% drop in exports this year from 2009.
  • Canada, another major exporter of wheat, expects the lowest wheat yields since 2002 because of crops that were destroyed by heavy rains or left unplanted.  That is great news for American farmers, who expect a strong yield from U.S. wheat crops. They will likely sell more of their wheat for higher prices to meet the shortfall from abroad.
  • Expectations for an increasingly smaller world stockpiles of wheat helped push prices for September delivery up 31.75 cents, or 4.8%, to settle at $6.93 Monday. It's the highest wheat close since September 2008.
  • Prices earlier Monday touched above $7 a bushel for the first time since September 2008, which was the tail end of a record-busting run-up in commodity prices that began in spring of 2007. Wheat prices topped out at an all-time high above $13 a bushel in February 2008.  [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]
  • If the huge rally in market prices continues in August, U.S. shoppers could pay 5 to 10% more for products made of wheat at the grocery store starting in fall.

Unlike the 2007-2008 run up caused by levered investment banks and hedgies, this one actually seems to have basis in fact.  But perhaps with QE2, Bernanke can help these same 2 groups make 'mad money' by driving the price back to "super cool" 2008 levels.

As an aside, one of the most recession proof areas of the country is the farm growing Midwest -  Nebraska has the 3rd lowest unemployment rate in the country at 4.8%, following North Dakota's 3.6% and South Dakota's 4.5%.  So if you can't live in the ring around Washington D.C. where the federal spending spigot is creating a taxpayer funded boom, go (mid)west young man.

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