In 1972, Russia's wheat crop failed. Russia had to dip into the global grain markets to meet demand. Before Washington knew the plight of its Cold War adversary, Russia bought up all of the surplus wheat in the US. Dubbed "The Great Grain Robbery," Russia's purchases sent grain prices soaring around the world.
Grain prices soon hit 125-year highs in Chicago. In a 10-month span, soybeans went from $3.31 to $12.90 a bushel. Food prices around the world rose 50% in 1973.
Some of the old traders are wondering if it's happening all over again.
On Thursday, wheat prices hit $7.25 a bushel, a 71% increase since the June low. It's the biggest one-month jump in three decades. The last time prices got this high was during the food crisis in 2008. (Wheat prices topped out at $13 then.) You may recall the ensuing food riots across the globe from Haiti to Egypt to Bangladesh.
Russia is again the center of attention. The worst heat wave and drought in a century has baked crops to a crisp in Russia, Ukraine and Kazakhstan. These three are among the biggest exporters of wheat in the world. They provide critical food supplies to the largest importing regions in the world - the Middle East and North Africa.
In some areas of Russia, the heat and lack of rain killed half the crop. Withered wheat stalks litter the usually fertile fields along the Volga River. This is one of the world's breadbaskets. Russia and the Ukraine alone were supposed to supply 18% of the world's wheat. Now it looks like Russia's exports could drop to zero.
Originally, forecasts called for 81-85 million metric tons of wheat, rye, barley and other crops. Now the Russian Grain Union says 72-78 million. Skeptics abound on that number, which looks too optimistic. The head of Glencore, the giant grain-trading house, thinks the real number will be closer to 65 million tonnes.
Holy smokes, I hear you say. Yes, it is bad. But it gets worse.
It's so bad that Glencore begged Moscow to ban the export of grain - as it did in the food crisis of 2007-2008. That's because Glencore thinks that trading houses around the world won't be able to fulfill their contracts to deliver grains. When Moscow bans exports, then trading houses can declare force majeure, a clause that allows them to escape these deals. On Thursday afternoon, Russia did just that.
Russia's crop failure comes at a bad time. Most of the world's wheat exporters are having problems. The Aussies battle locusts. The Canadians suffer from too much rain. Even European farmers struggle with drought. The Italians' beloved tomato crop will come up 10-15% short this year. Belgian potato farmers say drought will nick their yields. Polish fruit orchards will be down by a fifth. The French wheat farmers curse the skies as their wheat fields shrivel in the sun. The English sheep farmers, short on hay and grass, have sold their flocks early. Even the Dutch expect 10% fewer tulip bulbs this year.
The market is tightening and there are ripple effects across the globe. Over the weekend, Egypt bought 180,000 metric tons of wheat - its second purchase in two weeks and more than expected. Egypt is the world's largest importer.
One key difference this time around compared to 2007-08 is that inventories are in better shape - at least on paper. But I have to wonder. In India, government officials have let their once-plentiful grain stockpiles rot in the fields. India thinks food is too important to leave to the private sector. The government is in charge of food stockpiles. In a common display of government folly, bureaucrats, apparently, threw thin plastic sheets over these supplies and let them sit in the fields to rot and wash away in the rains.
The savior in all this looks like it will be the US. Stockpiles here should be healthy, at almost 30 million tons.
It seems like only yesterday the market took a cheerful look at the grain markets and said all was well. Global harvests looked like they were going to put in another record. I warned that nothing counts until the crops hit the bin.
Now that record harvest is gone, kaput, in just a month's time.
So what are the effects of all this? Expect ripples across the food chain. Prices for everything will rise. Prices for cocoa, coffee and pork bellies have already gone up. Beer brewers will pay more for barley, as the barley crop will be down by 20%. All flour-related products - breads, biscuits and the like - will be more costly. As The Financial Times reported, "Food executives are also warning about surging prices for feeding and malting barley, which could push higher the retail cost of products from poultry to beer."
How will this go over with the already rattled consumer in a fragile recovery? Many companies seem reluctant to raise prices. As Domino's CEO said, "Consumers are still hurting out there." Many companies hedge their exposure to food commodities, but if these prices continue to climb, it could crimp their bottom lines.
Meanwhile, the fertilizer stocks have rallied. From July 6 lows, PotashCorp (NYSE:POT) shares are up 34% and Mosaic (NYSE:MOS) is up 31%. The logic is simple enough. High grain prices inspire more planting. More planting means more fertilizer use. Already, as we've seen, volumes are snapping back in the fertilizer business. In their last quarterly reports, both Potash and Mosaic doubled their profits from a year ago.
Recent events show you, once again, the challenges in meeting the world's demand for food. The food crisis of 2007-2008 was not a one-off event. It was a warning. And today, we see again how quickly and easily we can get to another food crisis.
Hang onto those fertilizer stocks.
Chris Mayer
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- The Food Shock of 2011
- Aquaculture: Soybeans and Corn Under Water
- Are Farm Prices Destined to Rise as More People Compete for Food?
- Farmers Say ‘Rain, Rain Go Away’ Throughout the United States
- A Global Grain Powerhouse
About the Author
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
Comment by Jonathan on 10 August 2010:
I moved myself to benefit from any future prices rises in food owing to the issues outlined here. I did this literally, moving back to our family farm to learn the trade to see if I liked it. I blogged just a couple of days ago about how farm sizes are growing and rural communities are shrinking here in Australia, but also around the world.
It has amazed me since moving onto the farm just how fickle grain prices can be. Just a few months ago during planting, everyone was complaining about how low prices were. In our area people were relucant to plant wheat because of it's low price at the time, some switching to other crops.
These price spikes are a real double-edged sword for the world. On the one hand they're desperatly needed to give rural communities the world over an injection of investment funds that will arrest the decline in farming & rural numbers the world over. On the other of course are the humanitarian issues they cause with food becomming unaffordable for the worlds poor.
It's also worth mentioning that fertilizer prices will only remain high while commodity prices are higher to support them. Farmers won't use it if it's not economical to do so!
Comment by Unpopular Truth on 11 August 2010:
Sounds like farmers need to learn how to manage cash flow better
Comment by Jonathan on 11 August 2010:
Unpopular truth: You are right. Cash flow is a problem that farmers almost everywhere face. This is because you only produce 1 crop per year & you can't hold onto it forever when there are bills to pay.
Comment by bearamundi on 11 August 2010:
Ever checked out Jim Rogers on youtube? He thinks bankers should sell their masarati's and buy tractors so confident is he in agriculture/farming. I think you have made a great choice that will eventually pay off.
Comment by Lachlan on 11 August 2010:
Good on you Jonathon and yeah, what Bear said.
Keeping close ties with food production is a good idea under the circumstances.
On another note I've often wondered what sought of exposure to debt our Aus farmers really have (precise terms).
Comment by roy on 11 August 2010:
Some farmers do need to rethink their cash flow. The good news is there are plenty of ways to put away cash for a rainy day, any producer not holding 2 to 3 times their yearly profits have failed to plan and thus have a plan for failure. With grain/cattle producing properties in every state I feel lucky that unlike most growers we have reduced the risk of a bad season on any one property impacting too much on our buiness. Most producers / farmers need to learn far more risk management just to ensure they stay in business.
Comment by bearamundi on 11 August 2010:
Hey Lachlan,
You are the Tom Cruise of DR, showing us the money. Look at the uptick in USD and down in AUD, on cue as the Maestro (you're not Jewish perchance?)predicted. Still think it will be temporary but your indicators are precise.
Just thinking today what a shallow shallow shallow political debate it is so far.
Comment by Ned S on 11 August 2010:
The Chinese do seem to be remarkably practical in many ways - While CBA was buying up BankWest's $212 m in bad loans, they were negogiating 30 year oil deals with Russia, minerals deals wherever they could get them, and 50 and 100 year leases on ag land in Africa. It probably shouldn't come as too much of a shock if some of our pollies seem a bit limitted by comparison.
Comment by Lachlan on 11 August 2010:
Thanks Bear but honestly I didn't trade it and I dont get it right so often or Id be rich...which I aint. But the price action was forming an ascending wedge which is usually a good sign among others of a sudden reversal. Dont know from here how low to go either but if it plummets I suppose we get to see our Aussie PMs' appreciate
Hey Bear I saw an old aquaintence this afternoon. A lady...now operating a gold for cash shop in a shopping centre. She says they have over 140 shops around Aus. Gold to the moooon my friend...oops dont forget silver too
I should stop saying that. Its actually gold stays where it is and fiat off a cliff
Comment by Lachlan on 11 August 2010:
, and 50 and 100 year leases on ag land in Africa............."and so it begins"
Comment by bearamundi on 11 August 2010:
Good work though. Hey, sorry to be a nagger, but have you seen 'The Keiser Report 67'? The latest episode,on youtube? i've watched all 67 at work, heh heh. In this episode he is looking at the background noise on the trading floor and it shows robotic trading in action. Very interesting as Max dumbs it down so people like myself can understand, and it is funny as well.
Comment by Ned S on 11 August 2010:
It's all been said before I think Lachlan - But at the risk of repetition: We've got uranium, we're surrounded by water, and we've got plenty of dirt. No good reason we should go especially short that I can see?
Comment by Lachlan on 11 August 2010:
Ned I think there'll be a lot of dollars chasing big farm land in years to come.
).
As for Aussie and the GFC, I'm not predicting anything longer term on AUD. I dont know where its going from here. I'm sure we'll have our ups and downs with the GFC as it plays out, as will our dollar, but the epicentre of the drama is not here which is why I'm staying put (but not short..
Comment by Lachlan on 11 August 2010:
Wasn't aware of Kaiser until you mentioned Bear but I have watched a few now. One with Jim Willie was interesting. Videos are a pleasure.. instead of reading.