"SHOW ME" MARKETS...
Prepared by Commodity Information Systems, Inc.
(January 20, 2001) One of the primary reasons wheat prices have remained near lows of the past two decades is the opening and development of global trade. The World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) have broken down barriers and lowered tariffs more than any time in history. With free access to world grain markets, nations no longer need to maintain emergency food reserves. Instead, they can readily import wheat in years of short crops. Conversely, they can export surplus production in years of plenty. Recent wheat exports by India and Pakistan, normally importers, are examples of the change in world trade patterns.
With the understanding that food can be readily imported when needed, nearly all nations have eliminated reserve stocks. The most recent nation to move in this direction is China. They have been working off reserve inventories for two years by exporting record quantities of corn and drastically reducing acreage planted to wheat and corn. The chart below illustrates the extent of de-hoarding that is taken place in foreign countries over recent years...
Eliminating Food Reserves
Foreign Ending Stocks Of Wheat--Million Tonnes
With knowledge that wheat can be readily imported when needed, foreign nations have allowed wheat reserves to fall to unprecedented levels. The USDA forecast that foreign wheat reserves will fall to 87.7 million tonnes this year, the lowest level in 19 years. On a per-capita basis, or as "days of usage," foreign and world reserves have fallen to modern historic lows. Discarding of emergency food reserves has served to...
- expand world trade
- reduce inventory investment
- depress world prices
In seven of the past ten years, world wheat production has fallen short of consumption. The production shortfall has been made up by consuming emergency reserves. However, there is a point of diminishing returns at which the world must again rely on production to meet its needs.
World consumption of reserves has not been limited to just food. Spiraling
prices of crude oil, natural gas, and electricity are recent examples of
other commodities reaching their point of diminishing return. At some time
in the near future, wheat appears to be an excellent candidate to experience
a similar fate. A friend and professional trader recently explained this
phenomenon best..."These are show me markets...They must show traders
that supplies are going to be exhausted before the market moves into an
accelerated advance." This same trader told me late last winter that
natural gas prices should reach $10.00 by the end of the year and that
electricity shortages would occur during summer. I believe the wheat market
could be next.