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article imageWeather is responsible for worldwide wheat price speculation

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By Michael Cosgrove     Aug 16, 2010 in Business
Bad weather in Canada, Russia and elsewhere means that world wheat prices are being driven up artificially by speculation, claim market analysts and others, including the UN Food and Agriculture Organization.
Recent flooding and fires in Canada and Russia are just two factors in the dramatic hike in market wheat and other prices, according to French online daily RUE89, an example being the Paris commodity markets which offered prices under €140 until July, only to see them rocket to €214 last Friday. Prices have risen by 64% since the beginning of the year.
The main reason is said to be recent events in Russia. The world’s third-largest wheat exporter has lost about a quarter of its wheat harvest due to the recent heat wave and massive fire damage that accompanied it. Added to that is a government-imposed ban on wheat exports which is set to run until the end of the year.
Russia isn’t the only country driving up prices however. Other reasons include heavy rain and flooding in Canada which stopped preparations for this year’s crop, extremely high temperatures in Europe in June which are widely believed to have reduced both the quantity and the quality of wheat and other cereal harvests, and the effects of drought in Ukraine and Kazakhstan, both of whom are relatively big exporters who sow after summer, is expected to weaken the resistance of plantations during winter.
The irony is that the United Nations Food and Agriculture Organisation (FAO) considers that the world is far from the scenario of wheat shortages, despite a reduction in total harvest figures they had announced earlier, because “Wheat stocks remain high despite the rise in prices.”
Marc Tarabella is a consumer and agricultural issues specialist and a Representative in the European Parliament, and he explains the current situation by saying that “Speculators have found their new Greece. These markets react like any other markets. The vultures of the world of finance are creating a climate of doubt upon which they are feeding. The fear of shortages is winning out over any supposed shortage.”
The FAO is also concerned about the speculation, and it issued a media synthesis note in June stating that price hikes "might have been amplified by speculators in organized futures markets.” The note went on to explain that futures contracts “are generally traded before their expiration date. As a result such contracts, or obligations, are drawing growing numbers of financial speculators and investors, especially as they can provide attractive returns when equities and bonds may become unappealing."
However, both the FAO and others are prudent about the real and long-term impact of the current speculation. Michel Portier, the director of Agritel, a market advisory company specializing in agricultural products, is hesitant about what may happen, remarking that “Evolution is not easy to detect or measure. Speculation does exaggerate changes in the markets and amplify falls and increases, but that is not a mathematical process.”
The scale of price increases is bound to revive the question of regulating agricultural products he says, and he would like to see a more transparent approach. “We need to know the volumes being exchanged by both professionals and speculators. That’s the case for Chicago but not in London.” Those two agricultural market places are the world’s biggest. Portier adds that transparency is even more necessary seeing as what happens to one commodity can have a knock-on effect on the others. “It’s contagious” he says.
Adding to the uncertainty concerning the future of wheat prices is the fact that the two biggest exporters in the Southern Hemisphere – Argentina and Australia – do not harvest until December. And, as Portier says, “There are still risks that climatic “accidents” may occur.”
In other words, it all depends on the weather.
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