The Impact of Globalized Wheat
The Impact of Globalized Wheat

The price of wheat reached historic highs in 2007 and is continuing to increase in early 2008. Farmers and wheat traders are making lots of money. These traders are investing in wheat exchanges and other newly developed equities for wheat and other commodities. On the other hand, the price of cereal, bread, and other grain products, as well as meat and dairy products (which rely on grain to feed the animals) have increased as well. Poor people around the world are the hardest hit from the rising prices of basic food products. There are now “newly hungry” people in Latin America, Asia, and Africa. Governments who have large domestic food aid programs are being forced to re-think their aid as the prices for these programs spiral out of control.

A confluence of events led to the current high price of wheat, including:

  • droughts in Australia;
  • dry weather in the U.S., Canada, and Russia (the three largest grain exporters);
  • a 30 year low in the global wheat stock and the consequent removal of wheat from the global market place to be used domestically instead;
  • high demand for wheat and grains by India and China;
  • increased land being dedicated to plants used in bio-fuels (translating into less land available for wheat); and,
  • the spread of a virulent wheat fungus in East Africa, Yemen, and Iran (and potentially Central Asia and India.

The consequences for the rise in globalized wheat have the potential to be devastating or wondrous or both at the same time.

Environmental Factors
Environmental factors affect both the supply of and the demand for wheat. The U.S. and other countries are dedicating more crop area to wheat, corn, soybeans, sunflowers, and other grains because these crops are all selling at near-record prices. Nonetheless, the amount of crop to be harvested depends greatly on weather patterns. The U.S. Great Plains has experienced a moderate drought during the past year;1 Russian temperatures were higher than normal and drier than normal as well; and, Australia has been experiencing an extreme two-year drought where the temperature has been higher than normal.2 These weather patterns have decreased the global wheat stock.

The wheat fungus, ug99, has also affected the global wheat stock. The virus, which has the potential to threaten 70 percent of the world’s wheat crop, has spread through the air in the horn of Africa and to Asia. Israeli researchers have been working on an antidote, Sharon goatgrass, which has a high level of resistance to ug99.3

Crop pricess are also influenced by the high price of fossil fuels and the increasing interest in biofuels. Many countries, including the U.S., are requiring the replacement of fossil fuels with biofuels. The U.S., Canada, and Europe (in the absence of new technologies) will need to dedicate 30 to 70 percent of their current crop area to biofuel crops in order to replace ten percent of their transportation fuel to biofuels. Hefty subsidies are given to farmers who grow biofuel crops.

Wheat Exchanges and the Stock Market
Wheat and other commodities (for example sugar and cotton) are often sold on exchanges. Advanced exchanges offer the opportunity to buy the commodity using a:

  • spot price (the wheat is bought at the current price and then paid and delivered within 1-2 days of the transaction);
  • forward price (the wheat is bought at the current price, but paid and delivered on an established future date);
  • future contract (an agreement to buy or sell the wheat on a specified future date);
  • and, options contract (the right, but not obligation, to buy the wheat on a specified future date).

In the developing world, commodity exchanges are really helpful in expanding opportunities for farmers, many of whom are subsistence farmers. Farmers will no longer be beholden only to local prices and consumption patterns. Farmers will be able to think globally about their product. For example in Ethiopia a new Commodities Exchange will open in March 2008. Exchange warehouses will be set up for farmers to deposit their product until they are ready to sell. Electronic screens will be set up in the market towns as well, so the farmers can see the real-time prices of their crop. Crops will be graded and officially certified at these warehouses. The farmers will get a receipt for their goods from the warehouse, which they can sell whenever they want on the commodity exchange. The new Ethiopian Exchange will initially offer spot trading and will eventually offer futures trading as well.5

International organizations, such as the United Nations’ World Food Program, plans to take advantage of this new Ethiopian exchange since it will lower the price of its operations by saving transportation costs. The World Food Program needs to offset a $500 million dollar deficit in their 2008 budget, which is mainly due to the rising food and transportation costs.6

In the developed world, commodity exchanges have become very sophisticated and have recently attracted many investors who have not traded in commodities before. Since the stock market has been volatile and commodity prices have been rising, new investors are trading in the various commodities exchanges around the world.
7

For example, the price of wheat sold on the Minneapolis Grain Exchanged increased from $5/bushel in February 2007 to $22.40 a bushel in February 2008.8 The Kansas City Board of Trade and the Minneapolis Grain Exchange were forced to raise the daily trading limit for wheat contracts because there were so many interested investors.9

Government, Multilateral, and Corporate Responses
Since the high price of wheat is partially due to decreased supply. Some countries, such as, Kazakhstan, Ukraine, Argentina, and China, have taken wheat off the international market and are using it to fill supply shortfalls at home. Kazakhastan has even levied an export tax on grain to encourage domestic sales.10 Export tarrifs are not encouraged though because they discourage farmers from growing crops. Instead, reducing import duties is preferred.

European import duties for wheat, rice, and cooking oil have been cut and cereal import duties have been eliminated for the first time. India has cut import tariffs on palm oil from 88 percent to 45 percent since it has been suffering a cooking oil shortage, due to interest in using palm oil for biofuels. Brazil, South Korea, Nigeria, and Russia have all also cut import tariffs.11

Egypt, one of the world’s largest importers of wheat, is reconsidering how it delivers its $1.7 billion dollar subsidies for bread, sugar, cooking oil, and other staples. The bread subsidy alone cost Egypt $2.7 billion dollars. So Egypt is considering a cash distribution instead of the food item.12

While the increased price of wheat has helped many farmers and speculators earn money; other industries have been negatively affected by the high prices. Food companies, such as cereal makers, have been increasing their prices and changing their product line. Kelloggs, General Mills, and Sara Lee have all increased their consumer prices13 and changed their product line, i.e. Sara Lee is using cheaper lower protein wheat in its products and General Mills has reduced the number of Hamburger Helper products.14 Tyson foods, which sell beef and poultry products, expects that animal feed used to feed its animals will increase by $300 million dollars, but might even increase by as much as $800 million dollars. Overall consumer food prices are expected to increase 3-4 percent in 2008 (in addition to a four percent increase in 2007).15

Conclusion
Similar to many other basic commodities, wheat has truly become globalized. Weather patterns, environmental trends, energy prices, the stock market and commodity exchanges, and consumer demand all affect the price and availability of wheat. For Ethiopian farmers, becoming connected to this global network offers the opportunity to raise their standard of living; for restaurant owners and food corporations though, their businesses may be threatened if they are forced to raise prices too high. Some worry that the farm boom is another bubble and others believe that the increasing middle class in China and India will fuel interest and growth in commodities for years to come.

Comments
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Please click here to read, the response given by Professor Eric Waage of the University of California at Berkeley.


 1 Etter, Lauren. “Markets on Tear: Wheat, Oil, Euro.” Wall Street Journal. February 27th, 2008. http://online.wsj.com/article/SB120407427284295231.html?mod=djemITP&apl=y&r=337551
2 “Wheat Supplies, Already Tight, May Be Hurt by Global Drought.” Bloomberg News. March 4th, 2008. http://www.bloomberg.com/apps/news?pid=20601081&sid=aBXqreFosK5Y&refer=australia
3 Siegel-Itzkovitch, Judy. “Israeli plant could offer solution to looming global wheat disease.” Jerusalem Post. August 6, 2007. http://www.jpost.com/servlet/Satellite?cid=1186066396856&pagename=JPost%2FJPArticle%2FShowFull
4 “The high price of diverting food into energy.” International Herald Tribune. March 3rd, 2008. http://www.iht.com/articles/2008/03/03/opinion/edfood.php
5 Thurow, Roger. “Ethiopia Taps Grain Exchange In Its Battle on Hunger.” Wall Street Journal. February 27th, 20008. http://online.wsj.com/article/SB120407034024294923.html?mod=djemITP&apl=y&r=34365
6 “UN food chief sees high costs of fuel, foodstuffs not abating until 2010.” International Herald Tribune. March 6, 2008. http://www.iht.com/articles/ap/2008/03/06/europe/EU-GEN-EU-Global-Food.php
7 Lauricella, Tom and Ann Davis. “Commodity prices surge as more investors seek a haven.” Wall Street Journal. March 3rd, 2008. http://online.wsj.com/article/SB120449422153506115.html
8 Etter, Lauren. “Markets on Tear: Wheat, Oil, Euro.” Wall Street Journal. February 27th, 2008. http://online.wsj.com/article/SB120407427284295231.html?mod=djemITP&apl=y&r=337551
9 Ingerwersen, Julie. “U.S. wheat market eases logjam.”International Herald Tribune. February 12, 2008. http://www.iht.com/articles/2008/02/12/business/wheat.php
10 Ibid.
11 Miller, John. “High Food Prices Stir Movement on Tariffs.” Wall Street Journal. February 12th, 2008. http://online.wsj.com/article/SB120279263138961649.html
12 Fam, Mariam. “Food Prices Hit Subsidy Plans.” Wall Street Journal. March 4th, 2008. http://online.wsj.com/article/SB120459110472608979.html
13 “Price of bread, biscuits and meat to soar due to global wheat shortage.” December 17th, 2007. The Daily Mail. http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=503023&in_page_id=1770&ito=1490
14 Jargon, Julie. “Food Companies Tweak the Recipe.” Wall Street Journal. March 7th, 2008. http://online.wsj.com/article/SB120485677494718571.html?mod=djemITP
15 Ibid.

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