One of the most important processes conducted by markets is allocating resources from areas with over supply to those areas which have high demand. The allocation is done through price and trade. Prices rise and the potential profit of moving commodities from one area o another goes up. Unfortunately, governments can interfere in this process. The latest interference is in the wheat market.
Clearly, we are in an unusual market condition with wheat prices hitting all time market highs. Bad weather and low inventories are forcing prices higher, but added to this mix are changes in the tariffs on exports by leading wheat growers. We have droughts in all of the major wheat export areas and excessive rain in places like China. Inventories have been falling for years so we have hit the perfect storm for cereals. The US got a combination of drought and then too much rain.
Ukraine, the sixth largest wheat exporter, s has added tariffs to wheat exports. Ukraine has seen exports soar in the last few years as it natural competitive advantage in this area has taken hold, but the current drought has destroyed the 2007 crop. Russia, the fifth largest exporter, is now contemplating a ban on cereal exports or extreme tariffs. With Australia and Canada, as leading exporters, having a bad crop year, countries are scrambling for wheat and now they may not get it from some normal sources. This places more price pressure on the US, the largest exporter, at a time when the world needs a smooth allocation of food resources. It is unlikely we are going to see wheat price drop like we saw earlier this year for corn.
Of course, it is normal to protect food supply for your citizens, but this prohibitive sand in the wheel of trade only causes more market distortion to the world market. We are moving back to mercantilist policies for grains. Agriculture policy will see renewed focus and add government export policy uncertainty to the lists of risks in commodities.
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