Wheat Prices No Reason for Panic

Despite an expected 17 percent jump in the global price of wheat over the coming weeks, based on spot prices, there is no reason for panic, according to the Washington DC-base International Food Policy Research Institution. Wheat production remains 7 percent above 2007 despite drought and other problems in several wheat growing countries, the IFPRI said.

"Apparent similarities between today's rising wheat prices and the food-price crisis of 2007-2008 are just that: apparent, not real," said Maximo Torero, the director of the IFPRI's markets, trade and institutions division, in a prepared statement over the weekend. "Suggestions to the contrary serve to drive up prices and hurt poor people, who spend much or most of their incomes on food. They need neither jittery markets nor ad hoc protectionism, which has exacerbated past food crises."

As with the rice crisis of 2007-2008, the big variable in the equation is whether governments might panic and embargo exports. In the rice crisis, as many as 30 governments took various actions curtailing trade in the world's most important grain, causing prices to spike upward from US$350 per metric ton to as high as US$1,100 before the crisis ended. They have since fallen back to about US$450. The second variable is whether panicked governments go to the spot market to shore up reserves in case of shortages. That already has happened in Egypt, the world's biggest importer of wheat, with a perennially shaky government that is seeking to make sure there will be no bread riots. Jordan, Algeria and Tunisia have also resorted to the spot market to shore up stocks.

The IFPRI is supported by an alliance of 64 governments, private foundations, and international and regional organizations.

After rice and corn, wheat is one of the world's biggest sources of cereal grains. Following the worst drought in 50 years and widespread fires, Russia banned wheat exports in August until mid-2011. As much as a third of the wheat-growing regions of Russia, Ukraine, Kazakhstan and other parts of the eastern European breadbasket are expected to remain too dry for planting winter varieties, Bloomberg reported on Sept. 15. Hot, dry weather in southwestern Australia now is threatening crops there as well and heavy rains in Canada are slowing crop growth. Ukrainian customs officials delayed shipments of at least 380,000 metric tons of grain in early September. Kazakhstan is said to be considering an export ban as well. Unprecedented floods n Pakistan have played havoc with the wheat crop there.

For more than a decade, such agencies as the United Nations Food and Agriculture Organization have been concerned that a major disruption in food supplies could result in widespread starvation as climate change takes its toll on production amid rising population numbers. More than a billion people face chronic starvation. The BBC, Financial Times and other major news organizations have reported concerns that the export bans could create a situation like the international rice crisis of 2007 and 2008.

However, Torrero said, there should be no concern over wheat production, which is expected to hit 656 million metric tons, even after accounting for losses to drought and other problems in Eastern Europe. Global wheat stocks are 50 million tons higher than they were two years ago with the United States, the world's biggest producer, holding reserves of 26 million metric tons, which is more than enough to cover the combined losses from Eastern Europe and the former Soviet bloc.

Bad weather, he continued, has not hit all producers. The US, Argentina, India and Uzbekistan have enjoyed good harvests, as has Australia despite the late reports of hot, dry weather. And, although the FAO food price index rose by 5 percent in August, the actual peak is only 1 percent higher than the January level. The index includes not only grains but also oil, fats, and sugar—the prices of which also have spiked upwards for different reasons.

"In other words, for all the recent talk of runaway wheat prices, the impact has been minimal," Torrero said.

Prices would have to remain high for a prolonged period in order to drive up the price of bread to riot-prone levels. In 2007, prices rose continuously for months on end before hitting consumers.

"Two points bear emphasizing. The first is that volatility is not the same thing as inflation," Torrero continued. "The second is that volatility has stayed within the normal range since the end of the last food-price crisis. Indeed, recent spikes notwithstanding, the prevailing trend is flat or slightly downward. In consequence, there should be no knock-on effects."

The spikes in futures prices in September were "aberrations, extreme values of return that remain freakish and highly unlikely when viewed against supply, demand, and returns in the futures market over the past six years," he said. "Moreover, these spikes involved nearest-delivery contracts, looking ahead one month. Contracts of longer maturity are a better guide to overall market conditions. These also have adjusted upward—but at a much calmer pace. This is contrary to what happened three years ago, when futures prices of distinct maturities climbed relentlessly and in lockstep." Production rates for other key commodities including maize, rye, barley and sorghum are all expected to increase over last year, Torrero said. In addition, the crude oil prices remain at around US$74 per barrel, little more than half the US$131 in June 2008. Agriculture production prices are linked partly to oil prices.

"More thoughtful analysis has followed in recent days but not until after the earlier, more reflexive narrative had already caused another global price spike. That was the last thing consumers—especially poor ones—needed," Torrero said.