Friday, February 8, 2008

Wheat bubble?


The commodity markets have gone wheat crazy. Every wheat futures market has been up the daily limit. The CME has increased the limits to get the market to match buyers and sellers. Wheat is the best performing commodity market for the year. Adverse weather is cutting supply expectations worldwide and the inventories will be down from last year. 1975 was the last time we saw these kinds of gains in a week. Of course, corn and soybeans have also risen based on the same set of weather variables, but they cannot serve as a substitute for wheat. The wheat surplus is down 6.8 percent from the previous month.

The market is reacting around the world. China is raising its minimum purchase price to get farmers to increase production. Exports have increased as many buyers try to lock-in supply before there are any shortages. Brazil is lifting wheat tariffs from countries outside of the Mercosur trade bloc in an effort to stop price increases. The distribution of wheat is in flux.

Is this a bubble? While trading and price increase are frenzied, there will be a very low inventory of world wheat after years of strong surplus. The downside risk is high and buyers are reacting. Supply cannot keep pace in the short-run. The likelihood of sustained prices at current levels may not be high, but if you need wheat for consumption or processing, you cannot take the risk of not having what is necessary.

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