In the month of September food riots broke out in Maputo the Mozambique capital after the Government which had just a week ago increased the price of energy and water by over 10 % decided to hike the price of wheat by a whopping 30%. As the carnage and looting spread through the northern parts of the African nation, it's Government rolled back prices but not before dozens were dead and hundreds injured in the deadly riots. Elsewhere in Egypt, Niger, Serbia and flood hit Pakistan minor riot like situations have been reported as global wheat prices hit an all time high this year.
Prices of corn, wheat and soybean rose substantially this summer to 49% , 39% and 35% respectively at the commodities markets of London and New York, as news of the failure of the Russian and the Australian Queensland crop hit the market. The question in every one's mind is whether commodity speculators are playing out a repeat of 2008?
Are Banks and hedge funds once again using the tremendous liquidity provided by the stimulus money, hot money and the institutional investor's liquid cash to corner stocks in the future markets of commodities like Wheat,Corn Cotton and Soybeans. With both 10 days and the 40 days moving average looking up in food grains and Gold, Oil and Cotton also hitting all time high peaks, the coming months may see some real spiking in the commodity market bringing back the memories of 2008.
Let us investigate each the status of production and prices of each crop individually, starting with wheat .
Apart from the failure of the Russian wheat crop due to raging and uncontrolled fires in the wheat bowl of Russia during an unusually hot summer, the diversion of wheat to bio-fuels in the US and the UK is a cause of major price rise. Though presently none of these bio-fuel plants are operating at full capacity and a large number of them are yet to be commissioned, market speculation on anticipated demand has raised the price of the commodities at the futures market.
The futures market is expected to push up prices further as over 25 % of the food crop like corn and wheat are to be diverted to bio-fuels to take advantage of the carbon credits programs under the Kyoto agreement by the next three years. In US even farmland prices have seen an unprecedented rise, anticipating this trend of farm product prices in the futures markets.It even prompted the FDIC Chief Sheila Blair to remark that asset bubbles have started forming in the farmland real estate prices.
Russia is the fourth largest exporter of wheat in the world behind the US , France and Australia.It is also the traditional supplier to the competitive markets of Africa who need a moderately priced product to provide bread for the needs of the poor population. Since the last two years the Russian wheat crop has been severely damaged due to inclement weather conditions leading to Putin's banning the export of Russian wheat to its neighboring countries and traditional export markets. As a result their is a big demand from Africa on the produce of wheat from the western economies.
Though the shortfall of wheat from Russia has been more than compensated by excellent production in the US this year, the punters have cornered the produce of the market and prices have shot up of the commodity futures. Whereas some of this may be attributed to the Australian crop also being weak this year, the spurt in prices is much higher than the net shortfall of farmland produce.Taking advantage of excess liquidity available in the system, thanks to the continued stimulus for the Western economies, investors, hedge funds and Wall Street Bankers have built up large positions in the commodities markets.
Egypt the largest importer of wheat was forced to buy this year's supply from the US (hard wheat) at 10% higher prices as price of the French soft wheat that it usually bought, was even higher. As seen from the graph above the prices that rose sharply in July August have not retreated. It is expected that with the new round of QE2 funds flowing in to the market players through the big banks a further spike of oil and food grains is likely in December -Jan 2011.
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