Grain Markets Explode as the Great Dry Extends
23.10.06
Donald Burfitt-Dons, GWA

The striped shirted traders in the Grain Pits of Chicago are generally first to get the message on what is likely to move the prices of soybeans, corn or wheat. But last week the commodity markets were shocked when Australia announced a massive reduction in the country’s projected wheat crop. Out of the blue it was reduced from 25m tons to 15m tons in one fell swoop. At the Chicago Board of Trade, traders reacted quickly sending the price of wheat skywards taking corn and soybeans along with it. Two days of limit up prices followed as the market digested the implications. One of these was that Australia might not even be able to meet its export commitments. That could mean buying wheat from the U.S. Such an event would exacerbate an already tight wheat market in 2007 and 2008. The CBOT commodities traders took note.

For years complacency about grain supplies has dominated the grain market. Ending stocks have been on an upward path reaching a peak in 1999 of 208 mil tons, leaving an ending stocks to annual use ratio of 40%. But all that has changed as the temperate zones feel the bite of the expanding Hadley Cells read more on Tropopause. The current world ending stocks estimate for 2007 is a mere 20% with consumption outstripping production by 15%. That fact has put a panic into the large grain users. Normally, contracts for wheat are traded out a year ahead but now active interest is being shown out to 2008.

What does it mean for us? In terms of the big picture the arid countries of the planet such as Egypt, buy from the temperate ones such as the US, EU or Australia. But with those countries now beginning to feel the bite of rising temperatures and lower rainfall, production is beginning to decline rapidly. The small picture is that your bread will cost a lot more in the years ahead. In the UK gone are the days of the 50p loaf with supermarkets tagging the humble loaf at close to £1.

That Australia should be one of the first to see a really dramatic impact is ironic to say the least. Along with the US Government, Australia has been one of just two not to acknowledge Global Warming and did not sign the Kyoto Protocol.

Out on the sweeping plains of Western Australia, the farming families watch their crops wither as dust storms coat the stunted grain shoots with a fine powder. The hard-pressed farmers need little convincing about climate change. Every four days another commits suicide, crippled by debt and fifteen years of tightening drought. Across Australia the sheep and cattle farmers are flooding the market with animals they can no longer feed or water. Canberra politicians are beginning to notice as drought relief measures have already added £800m to the budget outgoings. They have yet to link the effect to climate change but eventually must see what the embattled farmers already realise. In what is already the driest inhabited country on earth it’s hot out there and getting hotter.