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Wheat Markets and the Lammas Spike |
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An air of desperation was evident in the November 2007 news release from the Soils Association, the manager of the organic food brand in the United Kingdom. This news release promoted its recently published study titled "Silent Invasion - the hidden use of GM crops in livestock feed." The association's motivation was not so well hidden. It is rather natural that the association become more involved in the genetically modified(GM) crops issue as it is the one tangible thing that sets organic food apart in a real sense from conventional food. The Advertizing Standards Agency recognised this in 2000 and since that time the organic movement has been rather restricted on what it can claim of organic food. But its GM free status is unassailable. As to the study, the temptation is to get into a debate as to whether the inclusion of feed material derived from GM crops is a positive or negative development. Or the implication of the GM material being so well "hidden" in the meat and milk that it is impossible to detect. But to do so is to fail to see the wood for the trees. The organic movement is more about perceptions than reality. The salient feature of the study is the recommendations and particularly the first one - that the industry and public require supermarkets, other food retailers and food manufacturers "to use only certified non-GM feeds by the middle of next year." This is an astute recommendation, even if some may find the connect with the study itself less than direct. And both the "if" and the "when" of it are important. The "if" might appear to be a rather large one. But the Soils Association has no doubt learned from the more strident element of the anti GM movement to exploit the strengths and weaknesses of the supermarkets. These are undoubtedly know to the association's policy director, Lord Melchett, as he was so involved with more strident elements of the anti GM movement prior to his move to the association in 2002. The report is very specific about the practices of the supermarket chains and catalogues them. This is no doubt a significant first step in getting them to toe the line more diligently. The supermarkets are, of course, unabashedly beholden to whims of public perception. In the case of GM foods the supermarkets appeared very willing to fall in line and re enforce, once the popular press had created the perception that GM crops were dangerous to either human health and/or the environment. The "if," therefore, may not seem impossible to the association. The challenge of the "when" is that it is surely tricky for supermarkets to verify something that cannot be detected. It raises the spectre of the supermarkets having to monitor the production process, as opposed to the product. This is, of course, feasible but costly. It is obligatory where conventional health considerations are an issue. Some may consider the GM issue as one of hygiene and hence monitoring of production processes as essential. But until conventional scientific opinion concurs with this, or more possibly this is a majority public opinion, GM-free certification will need to be something provided by the marketplace. There is, however, a short cut. Just as consumers know that Nike runners are swifter and Co-cola is more refreshing, organic produce is known to be free of genetically modified content. And so the Soils Association is in a unique position to deliver on, and benefit from, its own recommendation. It may be a long shot. But there is no crime in asking, one would suppose. Words 610 The reality of a tight supply situation has been with us for more than 12 months. While there have been brief periods when the kind of increases in prices we have seen in recent weeks threatened, they have generally petered out quite quickly. While ultimately any change in value has to be supported by scarcity or abundance, with prices providing appropriate rationing, the market naturally anticipates developments, or indeed fails to, in this process. In a historic context supply and demand measurements of the wheat markets have been supportive of higher prices for some years. Past experience has been of much higher real prices with equivalent statistical balances of supply and demand. Some possible explanations of this include better grain trading logistics making stored wheat more readily available, higher transportation costs tending to depress at source values, and a higher proportion of wheat stocks being held by importing nations. Prices have, however, moved significantly higher over the last year generally. And as is typical in such situations this has almost certainly been a result of major supply side developments. Output reducing droughts in the US Southern Plains in the winter and spring of 2006 and in Australia late last summer and fall in particular. And as is also very typical of such price developments, prices retreated somewhat following the initial surges. A major move this June has been rather more difficult to explain in terms of fundamentals. It has occurred as a recovery in at least US winter wheat has become assured and signs that the Australian drought has or is about to break. Against this drought conditions have developed in eastern Europe. Both the US Department of Agriculture and the International Grain Council both forecast an increase in global wheat production, the former's forecast being a few weeks more recent than the latter's, suggests an increase of 2.7 percent. Total supply will however be lower as a result of reduced beginning stocks. This and possibly the downward direction of the revision in output forecasts are generally attributed as driving the market. It could, however, be something of a Lammas Spike. Lammas is an ancient Christian feast at which bread made from flour from the new crop is blessed as a thanksgiving for another crop. While Lammas has a calendar date, the arrival of the new crop does not. And it is this that can have a material impact on prices over a short period just before a late harvest. If old crop supplies are tight, prices will tend to ration supply to meet anticipated demand up to the end of the old marketing season which is marked by the harvesting of the new crop. Those involved in trade will naturally be reluctant to carry old crop wheat forward to compete in the marketplace with wheat just off the combine. In fact, this is a time when traders favour a vacation. If harvest is delayed as little as a week, simple math suggests old crop demand will be increased by two percent. But more critically this only occurs at a time when it is too late for a moderate price increase to ration supplies moderately for the extra week's demand. In such circumstances it does not take much scrambling for supplies to drive prices higher. Such a delay in harvest is just what we have seen in the US Southern Plains - first a frost killing off early vegetative growth, then very favourable moisture extending the period of vegetative growth, and finally wet weather has prevented the combines from rolling. Any price impact will be very short lived and fade as soon as the weather clears and the grain is dry enough for harvesting. With the US wheat crop reported by the USDA on June 17 only 11 percent harvested, compared with last year's drought hastened 34 percent pace and a five-year average of 20 percent, there is little doubt it is a late harvest. But progress is being made and, if we are seeing a Lammas Spike, prices will soon fall away. 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