Complexities multiply in assessing wheat

by Morton Sosland
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Moves of wheat prices in recent years, regardless of direction and regardless of volatility, have been subjected to a range of analysis that is arguably broader than ever before experienced. No longer is it sufficient in discussing price moves to point solely or even mainly to supply-demand influences that at one time were without challenge as satisfactory ways of explaining fluctuations and pointing to future trends. Hardly anything underscores this new highly diverse approach more than contrasting the present with the success traders once had in utilizing the single, but simple, determination whether the carryover of wheat was increasing or decreasing and to opine that prices would head oppositely.

Of course, even that sort of fundamental analysis became complex when estimates had to take account of where ending supplies would be held and who would own them. A single carryover number became less relevant than details of ownership. That change arose initially when agricultural support programs resulted in government ownership. Determining what supplies were or were not available to the market became an art not unlike the relatively recent need to assess not just the overall wheat supply-demand picture but to look at regions and classes.

Hardly anything underscores these difficulties better than the wheat situation ruling in the crop year now closing. The dominant supply-demand force appeared to be a significant increase in the ending carryover, projected to gain 16 million tonnes to a new record of 211 million. But a little less than half of that increase is in China and India, two countries whose supplies are not readily available to international markets. A further large chunk of the gain occurs in Ukraine and Kazakhstan, nations that have withheld wheat from foreign markets in times of tightness. These uncertainties prompted the International Grains Council to say its global stocks figure “should be interpreted with caution.”

One consequence of these multiple influences and uncertainties has been expanded commodity trading. Like the wheat market, trading in commodity funds has shifted from funds designed to match the performance of leading indexes to a range of offerings that duplicate market complexity. Investment funds now offer opportunities for gains on the downside as well as from outright ownership. Others identify commodities with the greatest reward potential. One selects each month seven commodities deemed to have the greatest potential for price moves and divides the fund equally among the seven. Further, this fund follows a formula to choose investments based on the steepest future month discounts from current contracts. Just how such trading will affect wheat is hinted by the more than $50 billion invested in commodity funds, which is 20 times the total a decade earlier.

Strikingly different from these innovations in guiding investing in wheat and other commodities is the attention paid to valuations relative to gold and other commodities. Some of this reflects the way that wheat lags in these valuations almost more than any other commodity, in contrast to the oil-gold ratios that have kept fairly steady as both soared. One analysis notes that wheat prices in relation to gold were recently the lowest since the Department of Agriculture started estimating national average wheat prices in 1908. Recent estimates showed that wheat currently in its gold value is only a quarter of what it was at the low point of the Great Depression and is barely 10 per cent of the price ruling at wheat’s gold price peak in 1919.

The comparison with crude oil is not much different. When the Soviet Union did its surprise purchases of wheat in the early 1970s, the price of a bushel of wheat and a barrel of oil approached the same level. Currently, a bushel of wheat is worth less than a tenth of a barrel of oil. No wonder then that a case is made for investing in wheat, regardless of the stark realities of large crops and rising stocks.
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