Drought Expectations and Wheat Futures Prices

Google Finance provides daily data on Wheat Futures. In the graph below, I report the 2012 data for the WEAT Fund that is traded on the NYSE.

 

I apologize for the bad labels on the X-Axis but note that the futures price hit its peak on September 14th 2012.   When I Google that date, there are plenty of drought articles such as this one.  Since September 14th, this wheat price index has fallen 12%.   If world demand for wheat is soaring, how can prices be falling?  International trade must be filling the gap.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

26 thoughts on “Drought Expectations and Wheat Futures Prices”

  1. If world demand for wheat is soaring, and there’s a worldwide drought, how can international trade make much difference, except to share the misery equally (based, of course, on ability to pay, which is a crappy proxy for equality)?

  2. “If world demand for wheat is soaring, how can prices be falling?”
    Is demand for wheat soaring? As people get richer, they shift from bread and noodles to meat. Livestock aren’t fed on wheat much, more on corn. Corn prices have dropped a bit since September, but less than wheat, eyeballing.
    What is Matthew’s point here? That Americans should not worry about Western drought because it didn’t happen in other breadbasket countries? Should you wait to do something about it until there are droughts everywhere and there isn’t enough food to go round?

    1. “What is Matthew’s point here?”

      Probably that he’s too lazy to check the demand and production figures himself 🙂

    1. For consumers a drought anywhere is a (possibly small) drought everywhere.

      This is only true, of course, for consumers. For producers a local drought is a disaster.

      1. Which doesn’t change the fact that “droughts everywhere” are still not in the cards.

        1. “not in the cards”

          Care to elaborate? Because I think you’re blowing wind here. My view is this: we don’t know. That’s vastly different from “not in the cards”. But then, I’m not a card reader.

          1. It is essentially, thermodynamically impossible for us to have “droughts everywhere”, short of a situation where the planet is going into a genuine, Venus style runaway feedback loop. Water evaporates here, it has to condense there. The distribution may shift a little, but there aren’t going to be “droughts everywhere”. In fact, agricultural productivity is actually going to go UP in some places as the planet warms.

            In the middle of climatic excursions bigger than anybody could rationally suppose we’re in now, periods when there weren’t any polar ice packs at all, it still rained.

            You just sound like a fool if you posit “drought everywhere”. In fact, I don’t think, on reflection, that James was seriously suggesting something like that could happen. Rather, he was asking if we should wait until the impossible happened before doing anything.

            I think we’d rationally “do something” well short of that impossible scenario. I think we’d stop pretending nuclear power was nightmarishly dangerous, and replace fossil fuels with nuclear electricity.

            But my sole point here, is that the consumption of meat in most societies implies that we can rapidly adapt to severe reductions in agricultural productivity by shifting away from consumption of meat, to direct consumption of cereals. Starvation isn’t a result of agricultural failure, it’s a result of political failure, often just a covert form of genocide.

          2. Brett, your explanation is bullshit. You do not know these things. Your self-serving beliefs are a mere convenience for your POV.

            It may or not be interesting that the bottom third or so of your comment is not bullshit. It’s just commonplace knowledge. I have some quibbles on nuclear but I’m not going there here.

          3. Don’t know about you, but I actually had to pass engineering thermodynamics in college, so I do know something about it.

            The atmosphere is, in a medium term, in steady state. You put water into it, water has to come out of it. You trying to tell me water could evaporate until the humidity was 100% world wide, and it wouldn’t rain at night? That’s aphysical, except under circumstances which would imply the prompt extinction of all life on earth.

            Until we undergo the same fate as Venus, millions of years hence, drought here implies rain there. Precipitation may redistribute, it won’t end.

          4. I´ll concede Brett his pointless cheap win. I should amend my comment to ¨droughts in several major grain-exporting areas at the same time¨. Most of the world´s surface is water; most of the rest is mountain, desert, tundra and forest. Take out any two or three of the US Plains, Canada, South Russia and Ukraine, Brazil, and Australia and I suspect you have a majot problem. (North China and the Ganges and Indus plains produce for domestic consumption; failures there would be even worse.) Trusring to luck and ¨ïnternational trade¨ is unbelievably reckless.

          5. “Trusring to luck and ¨ïnternational trade¨ is unbelievably reckless.”

            I agree. While enough food IS going to be produced that nobody has to starve, starvation is not, in the modern world, a result of agricultural shortfalls. It’s a political decision, usually a form of covert genocide. International trade can’t do anything to keep authoritarian countries from starving their annoying minorities to death on the pretext that it didn’t rain enough.

            My only point here is that people aren’t going to starve because not enough food is being produced. People didn’t starve in Ireland during the potato famine for that reason, either.

            Why people starve in a world of plenty is a complex subject, but that’s the real subject.

          6. the consumption of meat in most societies implies that we can rapidly adapt to severe reductions in agricultural productivity by shifting away from consumption of meat, to direct consumption of cereals.

            True, but I don’t think that’s the point. We can easily adapt to the destruction of half the housing in the US by doubling occupancy rates. Whether that means we ought to shrug our shoulders if that were threatened is another matter.

  3. Going back to the original question by Michael…there is a fairly simple rule of arithmetic that may govern:

    If the two factors supply and demand are in equilibrium at a given price point, and if one of the two factors is somewhat rigid, then a relatively small change in the other factor may drive a surprising variation in the equilibrium price.

  4. Kahn’s point is the same as that of the vast majority of his writing here: we needn’t fear climate change because free markets can solve any problem. Of course, he knows this would be mocked, so he prefers to hint at this, hiding behind the vacuous statement that an index in international commodities has changed value because of international trade.

    1. It can, but the adjustments can be traumatic too. The Irish Potato Famine was accompanied by death and mass immigration.

    2. Exactly so. And then if we evolve further and deploy Soylent Green techniques, that would be the most efficient. I’m detecting some cognitive dissonance in Brett’s prescription…

    3. The conventional wisdom, fueled by hippy-talk and some doctors who deserve to be tried for genocide (I’m looking at you, Ancel Keys) may think this transition (from meat eating to more grain eating) is a good idea, but genuine science suggests that it’s a terrible idea. The (now-worldwide)

      1. [Damn keyboard mistype]

        The conventional wisdom, fueled by hippy-talk and some doctors who deserve to be tried for genocide (I’m looking at you, Ancel Keys) may think this transition (from meat eating to more grain eating) is a good idea, but genuine science suggests that it’s a terrible idea. The (now-worldwide) obesity and diabetes epidemics are caused by eating of too much grain.

        This is how Malthus plays out folks. Not in a big bang, but in a slow grinding reduction, one apparently inconsequential step after another. You may think it’s no big deal to switch from the current diet to an even higher fraction of grains than today, but what you will see (in many years, of course — like global climate change these things happen over a lifetime) is an increase in the “diseases of civilization” even over what we have now.

        Of course diet denialism is even more widespread than climate denialism, and taps into even deeper irrational parts of the human brain, so I fully expect this argument to be spitting in the wind.

        1. The conventional wisdom, fueled by hippy-talk and some doctors who deserve to be tried for genocide (I’m looking at you, Ancel Keys) may think this transition (from meat eating to more grain eating) is a good idea, but genuine science suggests that it’s a terrible idea. The (now-worldwide) obesity and diabetes epidemics are caused by eating of too much grain.

          That might be a bit overwrought and only partially true. Nevertheless, as you know, meat needs much more water than just grain. It won’t matter what people want in the places with more drought and drained fossil aquifers. They will eat the more easily transported water: grain.

  5. Many of us know that the amount of grain produced per capita peaked almost twenty years ago. I demand to know how the market has responded. The vaunted market hasn’t reduced the amount of capitas. Why don’t we see the market producing more grain? What is wrong with this “market”?!?

  6. Grains futures market are controlled by printed money feeding the short side of the market and funding losses when they are made. Prices default to the side of unprofitability all the time. And for the record, the USDA has Australia’s crop pegged about 5mmt higher than what it actually is. They do it all the time! Crooks.

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