Hackett Advisors in the News

Wheat Prices Rising on Russia Drought, But Panic Is Unjustified

Justin Rohrlich August 3, 2010 1:15 PM|

       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.

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 bills.

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 that.

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.

Hackett continues:

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.

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