Wheat Prices Rising on Russia Drought,
But Panic Is Unjustified
Justin Rohrlich August
3, 2010 1:15 PM|
USDA has estimated world production of wheat in 2010-11
to be 661 million metric tons, down 3% from 2009-10
but still the third-largest crop on record.
The drought in Russia, Ukraine, and Kazakhstan has
spurred the biggest one-month rise in wheat prices in
30 years, leading to a state of near-panic within the
food industry and warnings to expect a surge in grocery
Others are afraid that riots will break out, as they
did during the 2007-2008 global food crisis, over shortages
and skyrocketing costs.
“This is the fastest wheat price rally we have seen
since 1972-73,” Gary Sharkey, head of wheat procurement
at UK-based Premier Foods, told the Financial Times.
Dmitry Rylko, director of the Institute for Agricultural
Market Studies, said, “The scale of the drought is so
severe we must be prepared for any option.”
However, money manager Shawn Hackett, founder and CEO
of Hackett Financial Advisors, a firm with a specialized
focus on agricultural commodities, tells Minyanville
that the sky isn't falling.
“We went through this a couple of years back,” he says.
“Wheat was up around $12-$14, then it crashed. What
we have now is a supply-driven rally, which is temporary,
unlike a demand-driven one. A demand-driven rally, like
the one in coffee, is more of a problem.”
Hackett maintains that the market has “reacted to what’s
happened in Russia,” and believes the fears of a world
without wheat are unjustified.
“Remember, we went into this with very, very large
excess wheat supplies,” he explains. “There is no shortage
of wheat around the world. In the US, we’ve got more
wheat than what we know what to do with.”
The numbers support this.
The Minneapolis Star-Tribune reports:
The US Department of Agriculture reported Monday that
Minnesota’s corn, soybean, and wheat crops are in the
best shape of any state in the nation. And if those
conditions hold, the harvest of all three crops could
reach an all-time record yield.
North Dakota’s Grand Forks Herald writes:
The annual tour by spring wheat millers and buyers
this summer pegged the spring wheat crop at only a half-bushel
shy of last year’s record-yielding crop and nothing
yet, including early harvest returns, shows to contradict
The Seattle Times says:
Yields of Washington winter wheat are predicted this
year to reach about 65 bushels per acre, up from 59
bushels in 2009, while the spring wheat harvest is projected
at a record 56 bushels per acre, according to a forecast
by the US Department of Agriculture's National Agricultural
Statistics Service. Yields of Washington winter wheat
alone are forecast to be 111.8 million bushels, up from
96.7 million bushels in 2009, according to the USDA.
The bulk of the state's wheat is exported.
And the USDA has estimated world production of wheat
in 2010-11 to be 661 million metric tons, down 3% from
2009-10 but still the third-largest crop on record.
If this is all Russia has in store for us, I would
argue that the markets have overpriced the news in,
and could see a big correction coming in a week’s time.
Once the market says "that’s it" and we know
exactly what the real losses are, the market falls apart.
Just like stocks. You see it over and over again. Short
term, we have some of the highest overbullish sentiment
readings I’ve ever seen in the wheat market. We have
tons of wheat, now we’ve got to get it from where it
is -- here -- to where it isn’t. If Europe needs it,
if Russia needs it, we’ve got it. Once that transfer
of supply takes place, that’s that.
Russia’s wheat troubles simply mean that world buyers
will “have to get it from us, and we’ll gladly sell
it to them.”
Hackett also points out that “wheat is planted almost
everywhere in the world.”
“It’s also a very low-cost crop to put in the ground,”
he says. “The input cost is far less than soybeans or
corn, and farmers are happy to plant it because it’s
so cheap to grow.”
Hackett says there could be “modest price increases”
at worst, but the situation will be far from catastrophic.
The cash prices in the US are $2 below the futures
prices. The fact that people who need the wheat can
buy it for two bucks less than what they can buy the
futures for makes it not a big deal. Plus, it’s not
as if everyone is just now buying their wheat at these
high prices; it’s not like Europe just woke up today
and said, "We’ve got to buy all our wheat for the
year." They’ve been buying all year long, so they’ve
averaged in some highs and some lows. I don’t know of
any country that lives hand-to-mouth when it comes to
wheat. Nobody does that.
The speculative buyers who have been rushing into wheat
over the past few weeks have already missed the opportunity
that existed well before the headlines were blaring
that the world was about to starve.
“I told my clients to buy wheat at $4-$4.5, and everyone
laughed at me,” Hackett says. “Now they want to buy
at $7, which is absolutely the wrong time to buy. All
the newspapers say there’s no wheat around? I mean,
okay, I’ll put the order in for you, but good luck.”
Hackett also thinks companies that rely on wheat won’t
see much effect on their operations.
Anheuser-Busch (BUD) uses rice, so don’t worry --
you’ll still be able to get a bucket of Buds for six
bucks. Kellogg (K), General Mills (GIS), all the usual
suspects, shouldn’t be affected much. Yes, it is a significant
supply shock that has taken place, but it’s taking place
when we have plenty of wheat lying around. Two years
ago, this would have been catastrophic. But it didn’t.
It happened now.
The effects it could have on poultry producers like
Tyson (TSN) or Pilgrim’s Pride (PPC) are also negligible,
according to Hackett.
“In terms of feed, wheat and corn can be used interchangeably.
There is a component of lower-grade wheat grown specifically
for feed. And if wheat costs ever did get that high,
you’d just swap out wheat feed for corn feed, which
is relatively cheap. I don’t see any of this as being
a major margin compression issue.”
Summing up, the wheat market has gone from an overabundant
supply to an adequate supply, in Hackett’s opinion.
“This is not an ‘Oh my God’ moment, or at least it
shouldn’t be. The markets have overreacted, and overplayed
this by, in my mind, a full dollar per bushel.”
In short, anyone chasing the momentum here is late
to the party. The good news is, they can drown their
sorrows in a $6 bucket of Buds.