Wheat prices could defy a recession By James Saft Reuters Published: February 21, 2008
LONDON: The global market for cereals looks well placed to withstand a U.S. recession, its resistance bolstered by climate change and new dietary tastes in rapidly developing economies.
The price of wheat traded in Chicago has risen 13 percent this year and more than doubled since June, now standing at just less than $10.50 per bushel.
Declining water tables and unpredictable weather in major production areas have hit crops, and much arable land has been diverted to producing biofuels. Meanwhile, consumers in emerging markets like China are eating more meat as they become wealthier, driving demand for animal feed.
These factors are not likely to go away soon, even as general economic conditions worsen.
"It is mostly driven by world population growth, which is about 75 million people per year, and also by the more protein-rich nutrition trend in Asia," said Jochen Hitzfeld, a commodities strategist at Unicredit in Munich. He predicts a 50 percent rise in wheat, with prices to average $15 a bushel in 2009. Today in Business with Reuters High oil prices take a toll on the middle class in the Middle East Tax-evasion case spreads to U.K. from Germany France tries to build a public media giant
The trend, in fact, is not a new one. In seven of the past eight years, demand for wheat has been greater than supply, according to Unicredit, though so far that demand has been met by drawing down existing stockpiles.
The Department of Agriculture now expects wheat inventories in the United States to fall 40 percent by June. That would take stocks to the lowest level in 30 years and the lowest ever in terms of days of supply, according to Merrill Lynch.
Figures like these have helped bring a surge in wheat prices. From Feb. 1 to Feb. 11, Chicago wheat rose more than 20 percent, prompting U.S. exchanges to increase the costs of betting on future prices, as well as daily price move limits.
That helped prices to fall but has done nothing to change the underlying fundamentals.
A crucial factor is the long-term move to a more meat-based diet in emerging markets. Consumption of pork in China has more than quadrupled since 1980.
Meat, as a source of both calories and protein, is extremely inefficient, requiring a big investment of feed, in the form of grains, and water. For example, it takes 2 kilograms, or 4.4 pounds, of soybeans to produce 1 kilogram of chicken and 8 kilograms to produce one of beef.
And though wheat gets only marginal demand from feed, the rising demand for soy and biofuel crops has limited the amount of land devoted to wheat.
So what happens if the United States falls into recession, as many believe it already has? One concern would surely be that the recession hurts emerging economies, prompting consumers there to cut back on expensive food.
However, "it is hard to believe that the nutrition trend will be altered," said Hitzfeld at Unicredit. "These trends have been going on for 8 to 10 years and have survived many crises like 9/11 and the U.S. recession in 2001."
And, unlike other commodities that are sensitive to overall economic activity, like metals used in manufacturing and homebuilding, wheat should be fairly well supported within the United States and Europe, even in a recession. People still have to eat, even if they lose jobs and consume less gasoline or buy fewer electronics or appliances.
Agricultural products have a pretty good track record in recessions, although that is partly because of unexpected demand from Russia during recessions in the 1970s and 1980s.
"However, we do view the broader agricultural space as relatively well supported" in recessions, Lewis Hagedorn, an analyst with JPMorgan Chase, wrote in a note to clients, "as low inventories will likely require at least two more production cycles to ease, even under comparatively pessimistic demand scenarios."
So what are the risks?
Food price inflation is rising and politically unpopular. In the United States, it is running at 4.9 percent on an unadjusted basis over the past 12 months through January, raising hackles in an election year.
This, along with growing doubts about the environmental impact of biofuels, might prompt a rethinking of policies designed to encourage the use of fuel made from plants. If so, that could bring wheat back into production in areas where it has been cast aside.
Also, marginal land, both remote and less productive, might be turned over to wheat.
But all of these options have one thing in common - they take time. So in a year when almost every other kind of investment faces very serious risks and headwinds, boring old wheat could be a big winner.
