OK, now we all agree that while both gold and grains didn't suffer the same fate as their related equities, let's talk about what might or might not be more likely to bounce back.
If conditions and prices allow, farmers can (and will) grow more wheat (it has significant price elasticity of supply).
Recently, however, conditions haven't allowed production to meet demand. This article makes as much clear.
In it, they say:-
With world wheat stocks seen dwindling to 30-year lows by the end of the 2007/08 marketing year, and India and Pakistan scouting the market for large volumes of wheat, traders said there was very little chance for a big correction in prices. In addition, Australian wheat exports are likely to be nearly halved as stocks run out after two successive years of drought.
That sounds very good for wheat, short-term, I agree. It also says:-
Industry officials added that wheat prices, which have nearly doubled this year on crop worries in Australia, the United States and Europe and strong global demand, are likely to remain firm until a clearer picture emerges about U.S. plantings in January. "I would expect wild swings in the market until things become clear about plantings," said Mark Samson, vice president for South Asia of U.S. Wheat Associates, a body representing U.S. wheat farmers and exporters.
I don't know about the "wild swings" (I don't know enough about the wheat market).
Given this tendency, any short-term changes either in consumption or supply can result in imbalances that influence price movements. Moreover, global surpluses are concentrated with a few nations.
World exports of wheat account for around 18-20 per cent of world production. And, six countries or groupings — Argentina (8.9 per cent), EU (9.9), Russia (11.3), Australia (12.2), Canada (13.2) and the US (28.2) — account for close to 85 per cent of world exports.
Given this context, the USDA blames supply side developments in these countries for the upward pressure on prices. For example, Canada’s wheat output is expected to fall by roughly a fifth this year because of bad weather.
Weather-related factors are also expected to reduce supplies from major exporters such as the EU, Australia and Argentina, restricting availability in global markets.
Further, the increase in wheat prices this has triggered is not reducing demand. Not only are big wheat buyers such as Brazil and Egypt continuing to buy, but import dependent countries such as Japan and Taiwan have rushed into the market early to secure their supplies.
Moreover, occasional buyers like India, have also been significant purchasers in recent times. The net effect has been a surge in prices, argue analysts.
The data partly bears out these trends. The gap between production and domestic consumption across nations has been declining in recent years (Chart 3). So countries have less to export (Chart 4).
However, even accounting for these factors, the extremely sharp increase in prices in recent months is not easily explained. Even though global stocks have been falling, they are still at a comfortable 114.8 million tonnes or 18.8 per cent of global production — a figure roughly equivalent to the proportion of production that is globally traded in a year.
Taking into account the fact that rising prices would encourage farmers to plant more wheat, production can also be expected to adjust, even if with a lag.
For example, though exports in 2007-08 from the EU and Canada are expected to fall by one million tonnes each and that from Australia by 1.5 million tonnes because of reduced crop prospects, exports from Russia and the US are expected to rise by one million tonnes each because of improved production and the incentive created by higher prices.
In the circumstances the sudden and sharp rise in prices seems difficult to explain based on demand and supply alone.
So, are we approaching a topping of the price, or not? I don't know - I don't know enough about the market.
