Wednesday, September 1, 2010

A Hot Summer at home and in Russia

I took a hiatus from my blog postings to enjoy the summer. Of course, like many of us, I experienced the hottest summer in history on the east coast. Where I lived, we had 8 heat waves, meaning temperatures above 90 degrees Celsius for three consecutive days. It is September 1st and the temperature today will reach close to 100 degrees. What does it mean? Can all of the global warming pundits shout out in unison, "I told you so"? Of course, that might fall on deaf ears of the people who still deny global warming or that it is caused by man. Perhaps, as we see Russia dealing with forest fires and with 1/5th of Pakistan flooded by the heavy monsoons or Tennessee experiencing the most rainfall in one period of time in more than 1000 years, we can all work together and address this ever changing and unpredictable climate change. We will have to wait and see.

As I stated before, Russia faced the worse wild fires in its history this summer. Moscow throughout the summer was under a smokey haze. Also, Russia's wheat industry has been wiped out by these fires. As a result, spot prices for wheat rose by 24% in July and by more than 50% between the beginning of June and August 6th. In fact, the futures prices for September contract on the Chicago Board of Trades, which sales contracts of commodities, such as wheat, rose by more than 5%, which was the biggest daily increase since the end of the 2007-2008 food price spikes. Now, before you run to the supermarket and stock up on bread and flour, this movement in pricing is not unusual. The weekly wheat-price rises in July were no larger, compared with four weeks previously, than those during May and November 2009. In fact, if we look at prices over 12 week periods, they actually rose more at the end of 2009 than the past three months. According to Manuel Hernandez of the think tank, the International Food Policy Research Institute, this volatility is normal. The better indicator is not short term contract here, but long term ones, which have risen in price, but slowly. Another reason for calm is that we still have a significant global supply of wheat. In June 2008, the last "food-crisis", world wheat stocks fell to 121 m tonnes, the lowest level in 30 years. This was caused by the bio fuel frenzy and emerging markets growing demand for wheat. Today, we sit on 197m tones of wheat. This should be enough to absorb the impact of Russia's destroyed crop, which represent only 8% of the world's crop. Overall, the UN's Food and Agriculture Organization forecast that the wheat harvest will fall by about 5% this year. There will be a impact here, but not as cataclysmic as some feared. Also, this should benefit the US economy as one of the largest growers of wheat. Nevertheless, maybe it still is a good idea to get an extra bag of flour next time you are at the supermarket.

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