The Tribune

ACTIVTRADES WEEKLY

By Chris Illing

www.activtrades.bs

All Christians in this world pray hundreds of millions of times for “our daily bread” every new day. The ancient Romans, masters in preserving an empire, knew very well that “divide et impera” would never work without “panem et circenses”. Louis XVI did not possess this cleverness. Who knows whether the French Revolution would have happened if he had cut taxes on grain after two bad harvests in a row, and thus prevented the dramatic rise in the price of bread at the time? But, even in recent times, the tortilla crisis in Mexico in 2007 and 2008 shows that rising grain prices have what it takes to change the course of history.

This is one of the reasons why we should be concerned about the the significant rise in wheat prices that is currently taking place. After all, it is not about rare earths, semi-conductors or magnesium, but about a vital staple food. Wheat prices reflect wholesale prices. The most important trading venues for wheat are the MATIF commodity futures exchange in Paris, and the Chicago stock exchange. The wheat price on the stock exchanges is largely determined by supply and demand. However, there are other influencing factors as well. Never in history did so much have to be paid for a ton of wheat on the leading European exchange for agricultural products, the MATIF, as in the second week of November 2021. For the first time ever, the price for the standard contract traded there was over 300 euros, exactly at 300.50 Euros. It exceeded the highs from 2008, 2010 and 2012, when they were between 280 and 290 euros per ton. In the US, wheat was priced at $846 per bushel in November 2021, which is up from $749 in October 2021, and 63 percent above the $500 march achieved in November 2020.

The main reason for the increase is persistently strong demand from Asian countries, with simultaneous crop failures due to the severe summer storm in Iowa and periods of drought in other important growing areas. It is not for nothing that traders, farmers and producers are now wondering how things will go in 2022.

Another key influencer is the dollar price/exchange rate, as transactions are usually carried out in US dollars. The main wheat importing countries are Egypt, Indonesia, Turkey, Algeria, Philippines, China, Brazil, Bangladesh, Morocco, the European Union (EU) and Mexico. The oil price also plays a role in the the wheat price, as wheat often must be shipped over long distances in accordance with the orders from countries.

From an analytical point of view, the most recent increase already exceeds almost any “normal” movement. But things are rarely normal on the world’s stock exchanges, and certainly not now. In addition, new all-time highs also have the same informative value for agricultural goods, which are called “soft commodities” in the financial jargon, as for example for stock indices. On average, they are the best possible confirmation of an existing upward trend and make a forecast easy for precisely that reason. They are followed with a relatively high probability, further increasing rates and prices. The rise in wheat prices is therefore very unlikely to have reached its high point but will rather continue. Where exactly the journey will go, only the gods know in these uncertain times. But new records in the range of 8 to 10 percent should be waiting for us.

This increase is unlikely to happen in one go. Fluctuations, which can sometimes take on larger proportions, are always part of the financial markets. This is especially true in the current situation. The wheat price has been rising for nine weeks in a row above the Monday opening. That does not happen very often. A trend like this usually suggests that the short-term momentum has been completely exhausted, and that market participants will now slow down for the time being. This applies even more to striking resistances such as the previous all-time highs.

Resistances often only work as well as the memories of those who acted when they were created. Thirteen years is a long time for a stockbroker to remember, and there can be uncertainty about where exactly the previous highs were and what conclusions can be drawn from them. This creates uncertainty, and in such phases, if there are no good reasons to act differently, reluctance can set in. However, this pause is unlikely to change anything in terms of medium-term technology, which currently indicates a further rise in prices.

With a shrinking agriculturally-usable area in the world, weather instability in the growing areas, the simultaneous increase in demand and a productivity that can hardly be increased, prices must rise. We will not be able to overturn this market mechanism. It is not certain that food is abundantly available - especially not at today’s prices in the world. Our climate must be very important to us, as well as food for eight billion people. It is good that both are linked.