Monday, February 18, 2008


by the Sandwichman

A guy came into the food co-op today to pick up the four 25-pound sacks of wheat he special ordered. He told me to "pick up a couple of sacks of wheat for yourself and store them in your basement." So I took a look at recent news stories on agricultural commodity prices. Prices are soaring. Every kind of planted crop has increased in price by 30% to 50% over the past few months. This will have a huge impact on food prices.

Things are going to get very interesting.


Shag from Brookline said...

Variation on Marie Antoinette:

"Let them eat bread."

juan said...

Led by trade on the Minnesota Grain Exchange (MGEX), there were sequential limit up days that effectively froze the market, part of a short squeeze, unmet margin calls, rumours that the Canadian Wheat Board was stressed, elevator and/or bank failures.

From 8 Feb, big three grain exchanges, with CFTC approval, all raising margin requirements while loosening trading limits, which at least in theory should attenuate or stop the rise.

there is some real fundamental basis for the price rise but what began a few weeks ago went beyond this and has begun to really hit smaller bakeries as well.

For a visual, take a look at this chart:
MGEX front month wheat contract

Anonymous said...

Hmmmm... who was it that predicted a doubling of commodity prices, just by watching the gold price... I can't remember that commenter's handle....


Eleanor said...

Juan, you sound as if you know what is going on? Is this simply speculation? Or mostly speculation?

Brenda Rosser said...

In Australia the debt of Australian farmers has risen quite a lot in the last few years. There were very recent reports of farmers simply not having the money to plant the next crop and rural town mayors calling on the Federal government to provide interest free funds to solve the crisis. Mention was made of the escalating cost of pesticides, fertiliser, and fuel. All energy-related.

juan said...

Eleanor, I try to keep up with what's happening in finance especially as it has become increasingly determinant of commodity prices. As you know, energy and food prices have been rising rapidly, which is not disconnected from the trading in futures.
In short, finance has been attacking the average wage earner, pushing the cost of reproduction of labor-power up even as wages have stagnated and will likely be pushed down (again). Standard of living gives way to a more and more predatory capitalism unless labor can find some legs, reorganize, regain past militancy.

No speculation in my above post, though as noted, some rumours were in the news re. the CWB, bank failures and elevators.

The situation of market freeze was sufficiently serious that the three largest U.S. grain exchanges acted in concert to attenuate (or halt and reverse) the price rise, which was quite parabolic.

A short Financial Times article Wheat price controls have mixed results on the 11th used the term "price controls" for the actions undertaken while another but farm related pub had the following to say on the 8th:

An enormous amount of money continues to change hands in the multiple wheat pits – primarily linked to the Minneapolis exchange. The focus of supply and demand may have run its course, leaving money as the major player. I say this in part due to the companies which are being squeezed now on the other side of this run-away market. Grain elevators and large grain companies across the U.S. and Canada are facing critical junctures in managing uncomfortable lending situations due to margin calls. Banks have become more prudent with lending in recent months due to the U.S. real estate debacle. If you look closer at the Minneapolis market, you will not only see prices have spiked to above $15/bushel on the futures, but even more serious is the potential for that to go higher yet. The daily price limit on wheat is about to jump another ten cents to 40 cents per day. At this price tag, where does that leave the end users to financially defend hedge positions? It would speak volumes to agriculture if solid grain companies start to fold under pressure due to this money squeeze.

I can hear it now… the old timer 30 years from now in 2038 will be telling his grandson about the wild and wooly wheat market of '08 when prices defied gravity. But the second half of this tale has yet to be written. Margin calls and forced liquidation are now the primary driver of wheat price action as the “squeeze” in Minneapolis wheat has moved past the point where true fundamentals have much meaning.

Eleanor said...

Thanks for your comment, Juan. This is absolutely fascinating. Maybe it's time to go down to the Minneapolis Grain Exchange and watch the action in the pit. I haven't been there for years. As I remember, it's a bunch of stolid, sober midwesterners barking like hounds.

Though I'm trying to remember if they still do this or have moved entirely to computers.

Sandwichman said...

Thanks, Juan. I suspected something like this but don't have your technical knowledge of the grain markets. I would like to elevate your comments to a front page post. Would that be alright with you?

juan said...

Fine with me S-Man but I'd caution that my 'technical knowledge of the grain markets' is newly acquired and follows from what I've learned re. energy markets where the mania has not been so spectacular as that of the recent run in spring wheat which, even though down slightly, may not be over.

Oh, since I neglected to attribute the quote in my above, it came from Karen Ballhagen & Scott Davis' 2/8/08 'Sorting It Out' column at AgWeb.

Eleanor, yes, there's still open outcry but trading has also become electronic, including overnight.

Brenda Rosser said...

Curt Denisuik from the Canadian Wheat Board said, earlier this month:

I know there’s lot of people who are speculating that the Canadians are the reason that the market is going higher. But really, you need to look at the supply and demand for wheat. What the numbers kind of tell you when you look at that supply and demand analysis, is they (U.S. exporters) have been selling more on a per-week basis than they need to to meet those export numbers. The market is trying to attract … every last bushel in the bin. If these prices can’t do it, then the market will go higher, or someone will have to cancel a sale, and take a different alternative.”

From: Spring Canada squeezing bread.

Actually the Australian newspapers have been forecasting a dramatic shortage of wheat around this time in 2008. At least 6 months ago.

Time to start eating rice for a while.

OTOH I can't figure why wheat prices would jump $5/bushell over the weekend, unless it's the market catching up with increased demand?

These days it would also be harder to imagine the dodgy financial and commodities market NOT causing a crisis any any particular sector. Afterall the Australian and Canadian wheat boards are monopolies. They would find it easy to charge what they like in a global shortage situation. The agricultural sector has changed quite dramatically over the last 10 years. Towards ever increasing land and market monopoly.

It's very conceivable that ag corps would simply pass on the cost of higher interest rates and margin calls directly to the captive food market. Do you have details of this happening, Juan?

Paul said...

Whoa, everybody sounds very knowledgeable in this comments section, especially Juan thank you for your insight. So I thought I might share something with everybody as well. While these aren't my ideas, I found them just as interesting as everybody else's and its a good supplement to this discussion. Check out this article I found called Peak Foods! because it really gave me a good understanding of how people are looking at it from a investing standpoint and really let me know what people were doing in reaction to this.

Thanks Ya'll