Every market has those few moments in its history when all the fundamentals starts align to produce a cosmic rally to new record heights. There are a number of things that can cause a price rally, but it often takes a significant fundamental occurrence to cause a record rally in wheat futures prices. The following are three different events that lead to record rallies in wheat.
1) The first time that wheat hit $1.00 /bushel was in 1897. A leading cause of wheat passing the century mark, were shortages by two large producing and consuming regions: India and Europe. Today, India and the European Union account for 34% of global production and 32% of global consumption. With approximately 1 in every 3 bushels of wheat in the world being grown and consumed in these two regions, factors affecting them can have a strong affect on wheat futures prices. It’s important to watch the large global users of the wheat market. They have the ability to cause some fast volatile price rallies.
2) Another significant price rally was in World War I when wheat soared to $3.25 /bushel. As proven with the record wheat futures prices, war is another event that can produce record setting price runs. The effects of war on agricultural production hit on two fronts. The first is the destruction left in the European country side. Farmland was destroyed and for many farmers, it simply wasn’t safe to stay on the land. The other aspect is the war requires soldiers; soldiers from Europe, Russia, and the U.S. Many soldiers were farmers, which meant fewer hands on farms.
3) Ethanol production caused a price spike in corn prices as nearly 25% of the entire U.S. corn crop going to ethanol. Higher corn prices meant more farmers planted corn. In the past 10 years acres of corn planted has increased by 18%. Remember that there’s a finite amount of farmable land. Over the same period wheat acreage actually dropped by 4.5%, while consumption rose by 7%. Growth in yields were able to make up a little of the supply gap, but mostly global stock piles were drawn upon. Seven of the last eight years global wheat stocks have declined, until panic point was reached. After hitting 30 year lows, global stock piles are expected to increase by 25% this year as governments reload their strategic reserves.
The explosion of the corn based ethanol industry was a driving fundamental the laid the groundwork for the first $10 /bushel wheat futures prices. It topped out at $13 /bushel, which is the current record high price for one bushel of wheat. Fundamental drivers of prices, such as war, bio-fuels, and supply/demand can change at anytime causing a record rally in wheat futures prices.
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