Wednesday, February 20, 2008

Shortage of Wheat

I am long DBA at the time of this post. I am also using the Fidelity Special Situations Fund as an agricultural inflation play.

From CBC News:

Soaring wheat prices have Canadian bakeries struggling, farmers rejoicing and customers digging deeper at the till to pay for their bread and pasta purchases.

The price of flour has been climbing steadily over the last year. The price of flour has doubled in the past two months as weather problems, including two years of droughts in Australia, have depleted wheat stocks to lows not seen since the 1970s. Also contributing to the shortage is the flux of grain farmers switching to other crops, such as canola or corn, that produce biofuels.

"It's a very, very tight situation," said Canadian Wheat Board analyst Bruce Burnett. "World production has been under consumption in the last couple of years, so we have been drawing stocks down … and we've finally hit levels that have made the market very, very concerned about supplies and rightly so."

Burnett said the prices are likely to remain high for at least another 18 months, as it could take up to three years of strong harvests to rebuild the worldwide stocks.

Bakers rising prices

The pricing crunch is affecting bakeries, and their customers, across the country. In Winnipeg, KUB Bakery said its prices need to go up to help cover the rising costs. "We're not going to gouge anyone, we're going to take what we need to stay afloat. Bread is going to have to go up, any product with wheat in it will go up, that's a certainty," Ross Einfeld, the bakery's manager, told CBC News. "I'm sure all bakeries across the board have the same problem. Their flour price has doubled, their ingredient price has doubled. So you're going to see prices increase."

Calabria Bakery, in Scarborough, Ont., is also finding rising flour prices a challenge.
The bakery's Sam Cuzzolino said they use roughly 15 tonnes of flour a month for bread and pizza dough and "as far as the bread side goes, if we're breaking even I'd be amazed at this point." He said if the profits in the 50-year-old business continue to decline, he'll have to consider stopping baking bread altogether.

Mount Pearl, N.L., bakery manager Tom Bennett said bakeries can only swallow flour increases for so long. "It's such a labour intensive thing and really, when you see the cost going up …to pass it on to the customer, it's a very big increase for them to swallow," he said, adding that his customers would be upset if he raised his prices from $1.75 to $2.50 a loaf to help cover the costs.

The rising costs are also shrinking the bottom line at Coleman's grocery store in Mount Pearl, Newfoundland. "From what we were paying a year ago to what we're paying now, it's actually phenomenal," said Tom Bennett, bakery manager. "You wouldn't really think all these different things going on would affect the price of flour here in Mount Pearl, but it has."
Soaring prices have farmers 'optimistic' While bakeries are struggling, the high prices are encouraging for farmers.

Doug Chorney, a wheat farmer near Winnipeg and a member of farmers' group Keystone Agricultural Producers, says he and his colleagues are "very optimistic." "These are the best prices for wheat we've seen in many farming careers, perhaps ever. Everyone is optimistic this is going to be a good year, providing we can produce the crop that hasn't grown yet," he said.
Chorney, who said he has already decided to plant more wheat this year, also said the expected profits may help keep some farmers in the industry.
It "may encourage some young farmers to stay on the land and take up farming as a career," he said

And another story:

A massive shortage of wheat on the global market is setting the stage for what some market analysts say could be a "once-in-a-career" windfall.

The stage is being set for record-high prices for Prairie farmers, said Mike Jubinville, a market analyst with ProFarmer Canada, a Winnipeg-based company that helps farmers decide when is the best time to market their commodity.

Wheat supplies in the U.S. are expected to fall to 60-year lows by the end of May, the global inventory of grains continues to decrease as aggressive demand for high quality, high protein wheat is soaring, particularly in Asia, Jubinville told CBC News on Friday.

"In nominal terms, we're looking at prices that have never been achieved before on these various commodities, and obviously that's created a great deal of enthusiasm in the farm community," he said.

The last major rally on wheat was in 1996, Jubinville said, when it sold for $7.50 a bushel. Wheat is currently being traded at $19 a bushel, and the market value of canola has more than doubled. The profit potential for farmers is improving to levels that haven't been seen in decades, he said.

"This is, in my mind, one of those once-in-a-career years, that profits this year can make up for a fair number of bad years," he said.

"It seems like you almost can't go wrong growing any individual crop, and we're just trying to find the ones that have the potential to will make us the most money."

2008 will be the "year of the farmer," he predicted, a dramatic change from recent years, when farmers, plagued by early frost, delayed seeding and drought, seemed to lose money no matter what they grew.


domus said...

Very interesting post.
After reading I had a quick look at the possible ETFs covering commodities and food in Canada. I was surprised to see that, apart from some iShares covering materials and a Claymore fund (ironically called COW) covering fertilizer producers and agriculture stocks, there is no real Canadian based fund to buy metals, grains or other commodities.

In the US they have RJI (the Roger's index) and loads of variation of the DBA. They have great funds like the PCRCX. But if you are unwilling to carry the currency risk, there is no way to play the same stocks in Canada. Am I wrong? Do you know any good ones?

By the way, I don;t post much here but I like your work a lot. I just have a limited amount of time and I like to spend it rebutting nonsensical bullish arguments......

mohican said...

Thanks for posting domus.

Horizons BetaPro ETFs is coming out with an agriculture ETF in the next month for the Canadian marketplace.

MOO is another ETF I've been following too.

Tony Danza said...

2008 will be the "year of the farmer," he predicted, a dramatic change from recent years

Good! Now we can raise taxes on farmers to recoup the millions taxpayers put in their pockets during the lean times. Funny how those subsidies work, when times are bad for farmers I pay them to lose money, when times are good my food costs double and they cash in. Now watch these folk over invest and cry for more handouts when prices return to baseline.

Watch your commodity investments closely, as you well know this is all tied in with the rampant speculation in Oil and emerging markets and could turn south just as quickly as it ran up.

layman said...
This comment has been removed by the author.
layman said...

thank you, mohican,freako,rentah,yogurt and all!

I've just sold my first 2bdrm 30yr old condo into what can only be explained as "complete ignorance of how to use a buy rent calculator"...

wait im gonna calculate it...
$247 less out to rent, assuming i can get something as good or better for $900 in surrey, born and raised :)...

i'll let you know in a month.

meanwhile im praying i can get an annual 5% gain or better my first year investing, i could just put it somewhere safe like cash,or a mortgage?

I've already taken my 1000% gain (10,000 down paid 92500)sold 195000 minus tbd legal fees,
ive maxed my rrsp for the first time ever (original 10g back in pocket) so whats the gain on $0, ok i confess some sweat equity and homedepot debt no interest.

now looking for a place to go with rrsp? ships the wheat

also heard beers a good hedge on a recession, eggs and beans, kraft i just thought of that one:) loyal fan mohican please keep up the great work.