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By Mike Caggeso
Chicago wheat futures eclipsed $10 a bushel for the first time yesterday (Monday), fanning the flames of continued inflation fueled by higher commodity prices on top of a falling dollar.
The recent surge in wheat futures – up 30 cents (or 3.1%) to $10.095 – was stoked by wheat surpluses in Argentina threatened by dry weather. Also in the headlines, Egypt received $3.1 million in aid from Japan primarily to help boost the country's wheat production, Cairo-based and state-run newspaper Al-Akhbar reported.
Dry weather and floods around the world are responsible for wheat's price more than doubling in the second half of 2007. The world's largest wheat producers have reported significant drops in wheat production this year, instigating fears that we're going to see price increases in the many foods made from wheat: pasta, cereal, bread, flour, cookies, crackers, etc.
In a candid statement, Australia's government announced in September that its farmers would produce 31% less wheat (15.5 million tons) than its June estimate. Drought also hampered wheat production in Canada, the world's largest wheat supplier, as well as in smaller countries such as Ukraine and Syria.
But wheat is only the start of food inflation problems. Bloomberg reported that soybeans reached a 34-year high (17.25 cents a bushel) and corn rose to its highest price since February ($4.4325 a bushel).
"Global supply is really tight at this time," Tobin Gorey, a commodity strategist at Commonwealth Bank of Australia, told Bloomberg. "Saying there's a near-term top in the price is a very dangerous thing to do."
Saying there's a long-term top is just as foolish, too. For the first time, hundreds of millions of people in China are able to enjoy meat and dairy on a daily basis. And millions more will follow, not just in China, but in India and Latin America, too. Since grain is a big part of livestock feed, this adds an enormous and previously unseen demand for wheat.
The higher costs associated with wheat – and the higher price for wheat in the marketplace – probably isn't just a temporary blip. Over the long term, the price of wheat is probably going to go up, along with other agricultural commodities.
But don't be surprised by short-term price declines in 2008. Wheat's near-vertical run-up this year has some analysts anticipating a correction.
Farmers, sensing opportunity, have begun planting more for next year's harvest. The projected oversupply could easily cause wheat prices to tumble as much as 30% in the next year, analysts say, and is already affecting the price of wheat futures.
Because of market volatility, anyone looking to invest might want to steer clear of wheat all together. As an alternative, there are a number of investment opportunities diversified across the agricultural spectrum.
Deutsche Bank's Multi-Sector Commodity Master Trust (DBA) is intended to reflect the performance of four commodities in the agriculture sector – soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that well-known investor Jim Rogers advocates.
Another is Van Eck's recently launched and agribusiness-focused Market Vectors ETF (MOO). Like the Deutsche Bank fund, this ETF reflects the agriculture industry but in a very different way. Instead of investing in commodities directly, the ETF's holdings are concentrated in agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).
News and Related Story Links:
Japan Gives Egypt Aid to Boost Wheat Production, Al-Akhbar Says
Wheat's Forecasted Price Drop Highlights Profit Plays in Commodities|
Wheat Price Surges Above $10 for First Time on Supply Concerns
Wheat Futures Fall as Gain Seen Overdone; Corn, Soybeans Lower