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Record wheat price ignites food inflation fears
Pioneer Press
February 9, 2008
Area: Minneapolis, St. Paul
The highest wheat price in US history - more than $15 a bushel - was reached Thursday in Minneapolis as a trading frenzy inflames the grain markets, fans fears of spiking food costs and revives worries about food shortages.
With wheat stockpiles dwindling, a worldwide scramble is under way for bushels of high-protein spring wheat, the variety grown in Minnesota and the Dakotas and traded at the Minneapolis Grain Exchange. Already, spring wheat prices have tripled in the past year and are poised to move even higher.
"In my wildest dreams, six months ago I didn't see $15 wheat," said Ed Usset, grain-marketing specialist at the University of Minnesota.
Thursday's closing price of $15.23 a bushel may be jubilant news for wheat farmers and the rural Midwest, as the historic rally pushes corn and soybean prices near records, too. But it could mean new price shocks for consumers, and it already alarms food companies that need wheat for such consumer staples as bread, cereal, crackers and pasta.
In 2007, the rate of U.S. food inflation more than doubled to a 17-year high of 4.8 percent. Some expect that pace to nearly double again this year.
"We're projecting that food inflation in the U.S. is going to be 8 percent," said Mark Palmquist, executive vice president for the ag businesses of CHS, a farmer-owned cooperative based in Inver Grove Heights.
"Demand is so interesting this time around. It seems to be very insensitive to the price rises."
Fueling the price surge, observers say, is a combination of volatile factors:
-- Bad weather in 2007 hammered all of the world's major wheat-growing areas. A bigger wheat harvest in 2008 will require better weather - and time.
"It takes a while to get new land into production; it takes a while to switch crops around," Palmquist said. "All those things take time. I'm not saying prices will stay at $15, but prices will definitely stay higher than average for a while."
-- Foreign demand for wheat isn't drying up, despite the high price.
"Man, it is incredible, the strength that's behind this market," said Joe Victor of the commodity research company Allendale Inc., citing the recent run of foreigners buying even at record prices.
Because wheat is a food grain, "you have to have it," Chicago trader Jon Marcus told Bloomberg News on Thursday. "You can't say, 'Well, we just didn't make any bread today.' "
-- New interest from outside speculators. With stocks looking shaky and recession fears looming, commodities have become attractive among the fast-money crowd.
"It's a combination of index funds, hedge funds as well as investment funds," Victor said. "They can get into it for a month; they can be into it for six months. ... The majority of the price increase we're seeing is (fueled by) emotion, but there is underlying support for these markets to be rallying."
For now, the hottest commodity action is found at the once-sleepy Minneapolis Grain Exchange. The exchange was founded more than a century ago in an era when Minneapolis was the flour milling capital of the world, and it nourished local companies like General Mills, Pillsbury and Cargill. It remains the U.S. marketplace for spring wheat, a tough, high-protein variety that makes bread rise and bagels possible.
Thursday's closing price was the highest wheat price ever recorded at a U.S. exchange, officials said.
The price spike already has had one effect: The Minneapolis Grain Exchange next week will boost the maximum amount wheat prices can move during a trading day from 30 cents to 40 cents. The reason: Prices have been so volatile that the old limits can't keep up.
Nancy Krull, an exchange spokeswoman, said the March wheat contract has hit the 30-cent daily trading limit on 17 days in 2008, including Thursday, when prices opened 30 cents higher and never budged.
Late Thursday, the exchange announced a bigger step: It wants to remove all daily trading limits for the spot contract, if regulators consent.
"If it wanted to go up $5 a day, it could," Krull said.
Other boom-time effects may take longer. A boom in farm commodities could rework the economics of rural areas, which for decades have seen outflows of money and population. It also could create a powerful incentive to plow up new land for crops, a prospect that worries environmentalists who fear that fragile prairieland and forests will be turned into fields.
And it revives a long-dormant fear from the 1970s: What if the world runs out of food? The world is still a long way from that. But panic in the grain markets and the biofuels boom have people seriously discussing that question for the first time in years.
On Thursday, the local grain elevator in Halstad, Minn., was paying $16.13 per bushel for spring wheat. Despite that price, action was scarce.
"We aren't buying a lot at these numbers because there isn't a lot of grain out there," said elevator manager Robin Stene.
That's because most wheat growers in the Red River Valley sold their crop when wheat hit a record $6, $7 or $8 a bushel, he said.
So add one more impact: in town cafes everywhere, a bumper crop of farmers lamenting that they sold too soon.
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