The Return of the Commodity Crisis?

We did a double take this morning. We know it’s not 2008. And yet a look at this chart of the wheat price over the last month…

August 2010 Wheat

…and you might think the food crisis of ’08 was just a practice run.

A bushel of wheat fetches $7.85 this morning in Chicago.

It was “lock limit up,” rising the exchange-set maximum of 60 cents thanks to a decision from Moscow to cease exports of grain. Wheat prices have now risen 80% in a month, fueled mostly by news about a severe Russian drought and heavy rain in Canada.

“Prices have eclipsed the June 2009 highs and may be on the way to $8.50 or $9.00 a bushel,” observes our commodities guru, and editor of Resource Trader Alert, Alan Knuckman, “which is only halfway back to the extreme highs of 2008 at near $14.00.

“The winter wheat harvest in America went well. The June 9 USDA report increased its estimate of 2010-2011 U.S. ending stocks from 0.991 to 1.093 billion bushels. Worldwide, however, the year-end projections fell from 193 to 187 million tons, putting global pressure on wheat stocks.

“As a result,” Knuckman forecasts, “demand for US wheat has increased and will increase. A weaker dollar is also contributing to increase exports: 34% this year so far, versus the projected 16%. The dollar has dropped 10% from recent highs to make commodities more attractive to foreign buyers who will also benefit from strengthening in their currency.”

Demand for US wheat is about to get a kick in the pants, too.

“I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods,” Russian Prime Minister Vladimir Putin told members of his cabinet this morning.

The ban will take effect in 10 days.

Russia is in the grip of the worst drought in over a century of record keeping. A grain harvest of 110 million metric tons last year could shrink to as little as 63 million this year.

Likewise, the United Nations just revised its forecast for global wheat production. The previous forecast: 676 million metric tons. Now? 651 million. That’s the biggest downward revision the UN has made in 20 years.

In 2008, the last time Russia banned grain exports, it set off a wave of panic buying among importers in the Middle East and North Africa.

Forecasters are going out of their way to say they don’t foresee a repeat of the 2008 food crisis. But they acknowledge the longer the Russian drought drags on, the worse that is for the next round of wheat planting – with “potentially serious implications” for 2011-12.

Still, if we’re truly looking at the “drought of the century,” then the year we should be analyzing is 1972. That was the “Great Grain Robbery,” in which the Soviets snapped up almost all available US surpluses.

During the crisis of ’72, soybeans went up 390% in 10 months…food prices on average worldwide rose 50% in the first half of ’73.

“Farmers in the United States have held back crop sales, anticipating higher prices,” says Knuckman. “It has become a self-fulfilling prophecy that has added another level of volatility to an oversold wheat market.”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning