As Wheat Prices Rise… Carbohydrates Are Back in Style
by Tony Daltorio, Investment U Research
Thursday, July 22, 2010
As wheat prices rise, it looks like carbohydrates are back in style.
The commodity hit its low point in early June, but has since spiked to a 13-month high. In the last two weeks alone, it has risen 30%.
The September wheat contract on the Chicago Board of Trade traded at $6.00 a bushel last week. And Paris’ Euronext November contract hit a 22-month high at €177.25 a ton.
You can thank a global bout of poor weather for that, which led to renewed supply fears.
Since it all happened at the exact wrong time for wheat crops, analysts have cut their global outlook.
That isn’t just bad for cereal lovers either. Wheat easily factors into diets worldwide… for both humans and animals.
Fortunately, investors don’t have to starve.
Russia’s Poor Wheat Outlook
Russia produces an enormous amount of wheat. The world’s third largest grain exporter, it plans to double overall output by 2025.
One set back though, as Russia is experiencing its worst drought in over 130 years. 17 regions have declared a state of emergency due to the unusually high temperatures and dry conditions.
Temperatures currently hover above 100 degrees in some areas. And 11 of the regions have seen more than half their sown land destroyed. Overall, 20% of Russia’s crops have died, affecting nearly 25 million acres of land.
The country has cut its official forecast for grain production this season by 5 million tons. It now expects only 80-85 million.
Meanwhile, many industry experts have dropped their numbers even further. Compare their 2010 estimates of under 75 million tons to the 95 million Russia harvested last year.
Looks gloomy, right? Not to mention that, of that tally, 81 millions tons were of wheat.
Still, it doesn’t really have to worry about this year. 2009′s 24 million ton surplus will keep it exporting this summer.
But the longer-term future looks much less clear right now… especially since it needs to completely overhaul its grain export infrastructure.
Currently, Russia has only two deep-sea grain terminals in the Black Sea. Together, they can export just 18 million tons of grain a year. And more than half of the country’s Soviet-era facilities are out of date.
Yet even so, nobody knows whether the government will actually do anything about it.
More Weather Problems For Wheat
Other wheat-growing areas of the globe haven’t fared much better.
Hot, drought-like conditions in parts of western Europe, southern China and Kazakhstan have hit crops at a sensitive point in their growth cycle. Naturally, that has led to cuts in official output forecasts from these regions.
On the other end of the scale are the Ukraine, northern China and parts of Canada. Heavy rains have interfered with harvests in all three countries. And in Canada, wet weather has kept farmers from planting enormous areas of land.
Even in the U.S., the Department of Agriculture recently cut its forecast for the amount of acreage devoted to corn. And the higher corn prices go, the more farmers will switch to wheat to feed their animals.
Global wheat demand is already on the rise too. China’s poor weather means it needs to import more of the commodity than normal. The Canadian Wheat board expects to more than double its sales to China.
Three Wheat Investments
The market hasn’t really factored any of that in yet to the price of wheat. And as any investor worth his or her salt knows, that means it’s a great time to buy.
Unlike in Europe, Americans don’t yet have a pure-play vehicle to buy up wheat. But ETF Securities is expected to launch such a fund in the not-too-distant future. It already put out the Teucrium Corn Fund ETV (NYSE: CORN), which focuses solely on corn.
But in the meantime, two ETNs do exist that have exposure to wheat futures contracts:
- Elements MLCX Grains Index (NYSE: GRU), with 45% devoted to wheat futures
- Barclays iPath Dow Jones-UBS Grains Subindex Total Return (NYSE: JJG), which allocates 23.5% to wheat futures
With long-range weather forecasts predicting continuing weather patterns for a while at least, they have nowhere to go but up.
Good investing,
Tony Daltorio
- Cash in on Wheat, the Golden Grain
- The World’s Biggest Food Fight
- The 2010 Corn Crop: The Bullish and Bearish Sides of this Commodity
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