Climate Change a Secular Event in Grain Markets

Montreal, Canada

Climate change is here and it’s bad news for consumers.

Increasingly, a barrage of weather phenomena has adversely impacted crop yields just about everywhere over the past four years. No region has been spared. Crop inventories are now at their lowest levels in years – especially corn and canola.

Last year, Russia’s wheat harvest ranked as the lowest in almost twenty years following unrelenting heat waves, Australia suffered massive droughts and Canadian crop output declined because of wet weather. China’s grain output also declined and for the first time became a net importer of corn.

Grain prices have rallied between 40% and more than 160% over the last 12 months, depending on the market. Corn and barley, for example, have more than doubled. Bran has almost tripled.

Some countries are recovering this year, including Russia. Her wheat harvest is making a comeback and speculators in all grains should watch the markets carefully for other successful harvests because prices are overstretched near-term. But longer term, I’m convinced grain prices will head significantly higher because most countries can’t satisfy growing demand.

A combination of falling water tables and booming demand for grains and other agricultural products in the emerging markets has turned the tables on food production. I’d say the bull market in the grains, which began in 2007, is probably where the industrial metals and precious metals were in price terms back in 2002; there’s a long way to go.

According to Nestle, the Swiss food giant, global food production has trailed demand by about 1% per annum over the past twenty years and it’s getting worse. Basically, we’re outgrowing the Earth’s food supply.

Canada became the latest victim as flooding knocked-out six million acres of farmland this summer. The Canadian Wheat Board projects farmers will plant 20.3 million acres of wheat this year, almost 2 million acres below average, according to The Globe & Mail this morning. That’s the smallest crop since 1971.

A broader commodities’ pullback this summer remains a high probability and the selling that started in May hasn’t run its course. The end of the Fed’s extraordinary monetary injections concludes in two weeks and that loss of market liquidity will impact all assets, at least over the near-term. Use any weakness in the grains to accumulate larger positions this summer.

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