Wheat is the grain that traders love to hate, says Ned Schmidt of Schmidt Management Company. "Listening to their opinions would make you believe the price of wheat is going to zero. Something far different is likely!”
Schmidt comments that today, ag commodities are operating on the price-inelastic component of the long-run supply curve: That means the focus should be on demand, not on supply.
USDA's June crop report supports that notion: Stronger than expected use shifted the trade's attention from new-crop production to demand. In wheat, reduced carry-in from last year's crop almost offset a 24-million-bushel increase in wheat production, mainly due to higher yields for hard red winter wheat, reports USDA economist Gary Vocke.
shows global wheat ending stocks. In 2008, global wheat supplies fell to a dramatic low, which led to a rather robust move in prices, Schmidt points out. Since then, stocks have risen considerably due to good global crops. "However, the meaningful part of the graph is the red line, using right axis. It is how many months of wheat consumption are in storage. In 2008, the world only had 2.4 months of wheat on hand. For 2011, end stocks are estimated at about 3.5 months--up dramatically from 2008, but hardly representing food security for the world.”
Futhermore, the majority of stocks are in China
. "If Chinese wheat reserves are excluded from the calculation, the world will have only about 2.8 months of wheat consumption in reserve—very similar to 2008,” says Schmidt. "And China's stocks are a government insurance policy against food shortages—not as likely to move into market channels as stocks in other major producing countries.
"Given strong demand levels, if any production problem arises, prices will be very volatile,” he says.