By Greg Peel
After spending June consolidating around the previous high of US$525/bushel, Chicago Board of Trade wheat futures for July delivery gapped up on Monday night to US$556/b and ran again last night to close at US$565/b.
Commodity watcher Dennis Gartman reports the gap occurred following news out of the Ukraine - a globally significant wheat growing area - that crop problems had forced the government to halt exports until such time as a better estimation of the wheat crop can be made. The United States Department of Agriculture took a stab, suggesting the Ukraine winter yield will be down to 14.0mt from an earlier estimate of 17.3mt. On the assumption that the problem would not be particularly localised, the USDA cut its Russian crop estimate from 48.5mt to 45.0mt.
The Ukrainian Agricultural Ministry then chimed in with its own revision - down to 12.0mt. It is thus likely that Russian estimates should be lower as well. Gartman noted:
"Indeed, things have gone from bad to worse so swiftly regarding Ukraine, that many in the industry are now projecting that the country will stop exporting wheat entirely and may even become a net importer! Remember, Ukraine exported 6-7 million metric tonnes of wheat in the past year, so this is rather materially bullish news."
Following its crop revisions, the USDA lowered its estimate of the 2007-08 world wheat crop to 112.03mt - which suggests the remaining inventories will be the lowest in 30 years. That's before considering Kiev's more bleak adjustment.
The gap was consolidated last night as wheat prices in both Chicago and Kansas City rose to 11-year highs. Heavy rain has slowed harvesting in the US bread basket states and reduced yields. Only 5% of the winter crop was cut by June 10 compared to 17% this time last year and a five-year average of 10%, Bloomberg reports. At this point the USDA rated only 52% of the crop as "good" or "excellent" - the lowest rating of the growing season.
In Kansas - the biggest winter-wheat producing state - only 1% had been cut compared to 13%, and in Oklahoma - number two - 25% had been cut compared to 76%. One presumes the waving wheat don't smell so sweet.
Wheat futures have risen 51% over the past 12 months as regional droughts across the globe (including you know where) have cut production.
The sleeper in the great macroeconomic debate is food. Weather-related influences aside, crop prices are being boosted by increasing demand for Western-style foods coming out of Asia and other emerging economies, and also by the rapidly increasing introduction of ethanol into fuels, particularly in the US. Many a US corn farmer is now giving over his land to continuous corn production to feed into ethanol demand, which is being driven by the Bush Administration's policy to reduce oil usage through ethanol promotion. Corn farmers would normally rotate crops between corn and soybeans, so the prices of both have risen. Corn also gapped up on Monday night.
Despite the US push into corn-based ethanol, experts suggests that cereal products are inferior, and thus dubious as fuel additives, compared to purer sources such as sugar. The world's primary source of sugar is Brazil. This assessment hasn't, however, stopped US farmers attempting to cash in on the latest fad.
While the world looks for signs of impending inflation via the oil price, and the price of raw materials, food inflation remains as an insidious threat. The greatest impact of higher food prices would be felt in Asia, where the average weekly food budget represents a much greater proportion of weekly wages as compared to the West. Not because they eat more, but because they earn less. If food price inflation has a significant impact on China for example, it could be sufficient to derail the economic locomotive.
Prices in Australian agricultural stocks have become very volatile in the last two days, with ABB Grain (ABB) leaping up yesterday only to be unceremoniously slapped down again, Graincorp (GNC) surging higher but off this morning, AWB (AWB) making its move up this morning, and Incitec Pivot (IPL) gapping up strongly yesterday.