Causes of changes in wheat prices

Causes of changes in wheat prices Since the summer of 2010, we have seen the price of wheat significantly increasing. In this essay I will outline the possible reasons why wheat prices have shot up in recent months and also introduce methods of intervention that can be used to try and contain the price rises. This year has seen irregular weather patterns considerably affecting harvests in many major wheat producing countries. This has in fact manufactured the recent spike in wheat prices across the globe. Russia’s harvest has been the most significantly affected by the weather. During the summer, Russia and the Ukraine had been experiencing severe droughts and wildfires which have prevented the growth of crops, also destroying a third of their produced wheat. As a consequence, Russia announced a ban on all exports of their grain from the 15th August – end of December, which was then extended into 2011. After the failure of the Russian harvest alone wheat prices shot up by 20% alone, illustrating a rest riction in supply of the grain. After this announcement the US Department of agriculture cut its projections for the next year’s world production of wheat by 15.3m tonnes to 645.7m tonnes. However, it is important to note that wheat stocks are higher still than crisis levels witnessed in 2007-08. This projection and halted production have caused wheat prices to increase on the future markets to their highest levels since the last crisis. Canada, the 2nd largest wheat exporter in the world has been severely affected by heavy rains which have prevented farmers planting seeds and also destroying hectares of land, considerably damaging next year’s harvest. India, the 2nd largest wheat producer, was hit by severe monsoon rains in August which heavily affected their wheat storage. They had insufficient storage, causing around 10m tonnes of wheat to be at risk of rotting due to it being exposed to the rain. Also, Egypt, Serbia, Australia and Pakistan have been hit by major fl oods which have destroyed up to a fifth of the countries crops, reducing supply further and aiding the price increases. The combined effect of these weather disasters is shown in the diagram below: The diagram shows that supply has fallen from S1-S2. This has reduced output from Q1-Q2 and increased the price from P1-P2. Here you can see that the change in price is considerably larger than the change in output. This is due to the fact that wheat is a necessity and therefore is price inelastic, which is represented by the inelastic demand curve. This means that with a reduction in the supply of wheat, even if it is below crisis levels seen in 2007-08, there will be a large increase in price. Another reason why prices have been rising lately is because of the rapidly increasing global population. The global population is rising so fast because emerging countries have the fastest increasing population rates. Many emerging countries are becoming wealthier meaning that demand for grains i s increasing faster than the population. However, it may be argued that recent spike in wheat prices has been caused by uncertainty in the market and panic buying, as a result of export restrictions and a fall in supplies. It may also be argued that recent price rises have been exaggerated due to ‘Speculators’. These are investors who purchase wheat on the commodities markets expecting further price rises and are compressing supply whilst making profits from doing so. This results in short term increases in the price of wheat, which is what we have witnessed in recent months.