After going nowhere for much of the year, wheat prices have rocketed recently. In Europe they have gained almost 80% in the past six weeks. US futures shot up by 25% last week alone, reaching a two-year high above $8.40 a bushel. Prices haven’t risen this quickly in almost 30 years.
Russia, the world’s fourth-biggest producer and exporter, is suffering from its worst drought in over a century. Last week it imposed a ban on grain exports until the end of the year in order to prevent shortages. And it has now signalled that the freeze could be extended into 2011. The poor harvests in Russia and the Ukraine have also boosted the price of other drought-struck grains. Barley prices have more than doubled in six weeks.
And there is scope for further price rises. Other wheat producers in the drought-stricken Black Sea area could restrict their exports. Meanwhile, global inventories are “at comfortable levels”, well above where they were in 2007/2008 when wheat reached a record high, says Barclays Capital.
Yet the “cushion is less comfortable than it looks”, says Jack Farchy. The “exportable wheat supply buffer” looks pretty thin. For instance, a large proportion of stocks in China and India, both large producers, are “strategic stores”. These are meant to cushion the local population from food-price rises and will never be exported.
The US does have enough wheat to fill the Russian gap as its supplies are at a 23-year high. But there could still be price spikes ahead if logistical bottlenecks cause temporary shortages. America would be shipping its large corn and soya bean crops along with wheat. The upshot is that while prices are unlikely to repeat their run to record highs, sharp swings are set to continue.