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business newsWhy Wheat Isn't a Worry Yet
How much wheat prices have affected relative food price inflation over the years and the implications of the present jump in prices associated with a drought in Eastern Europe and the former Soviet Union.
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Let’s take two of these indices, the CPI for food and the CPI for all products except food, and map their relative year-over-year changes all the way back to the Eisenhower administration. The largest feature on this chart is the huge spike in relative food costs from the early 1970s; this was the time of “The Great Grain Robbery,” when Russian buyers moved en masse and often under the cover of shell companies to replace their own failed harvest. Some posited a deal between them and the Nixon administration involving the Vietnam War, but that was then and this is now.
How much have wheat prices affected relative food price inflation over the years, and what are the implications of the present jump in wheat prices associated with a drought in Eastern Europe and the former Soviet Union? If we map the cash market prices for three major grades of wheat -- the soft red winter wheat trade on the Chicago Board of Trade, the hard red winter wheat trade on the Kansas City Board of Trade, and the hard red spring wheat traded on the Minneapolis Grain Exchange -- we find the connections to be rather tenuous.
There's about a nine-month lead time between cash wheat prices and relative year-over-year changes in food versus ex-food inflation. That places any impact near the Southern Hemisphere’s wheat harvest in early 2011. As most US flour mills, food processors, and bakeries have fixed or capped their price commitments, the present jump in wheat futures, about 30% from the 2010 lows reached in early June, shouldn't have an immediate impact either on the operating margins of these firms or on relative food price inflation.
Farmers traditionally favor higher inflation as they're net debtors, leveraged to the prices of food and farmland and tend to regard a weaker dollar as an export-enhancement tool. Moreover, decades of federal agricultural policies have provided price supports to farmers whenever prices fall, and those very same farmers and their political patrons always find a way to capture that money even when prices rise. It will be interesting indeed to see whether farmers and politicians from farm states start focusing on relative food price inflation and whether they can convince others that higher food prices are somehow in the national interest. Agriculture is and always has been one of America’s most productive and one of its most politically favored sectors, and if policies swing in this direction, farm equipment and fertilizer firms should benefit.
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