According to this Bloomberg Businessweek article, market sentiment is that the rally is overheated, which is why futures are down for the third straight day. The article cites analysts who claim that global stocks are just fine despite the Russian export ban, and that the supply situation is nothing like in 2008. Take a look at the historic price for wheat, which peaked that year.
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| (Courtesy indexmundi.com) |
The story line here is that in 2008 there was worry that world stocks were so low that food riots would break out in third world countries. Simple supply and demand, right? Wrong. Here is a chart of world wheat production for the past twenty years (Data courtesy USDA-ERS):
True, U.S. production was down a bit in 2006, but world production was not off enough to cause that kind of peak in the futures price. Overall world production has risen about as much as world population over the last twenty years. At some point what we refer to as a commodities futures "market" stopped behaving anything close to rationally. I suspect it's when this happened, again from the Bloomberg article:
Speculators including hedge funds raised their net-long positions, or bets wheat prices will rise, in futures and options by 5.3 percent in the week ended Aug. 3, the smallest increase since they turned bullish last month, U.S. Commodity Futures Trading Commission data on Aug. 6 show.
How many farmers will double over this year's wheat crop, or plant wheat instead of a planned rotation crop in response to last month's perception of shortages? Let's hope not many. Next spring those same funds that went long on what we are supposedly just realizing was a non-technical run-up, will short the futures all the way down. The game is up, only the house is left at the table.
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