World Grain - August 2014 - (Page 6)

FROM THE EDITOR-IN-CHIEF Fundamentals drive wheat prices W hen France held the presidency of the European Union several years ago, international grain markets were being roiled by unprecedented advances in wheat prices that began during 2008 and continued several years thereafter. It was at an E.U. meeting that France proposed the union press in international forums for implementation of new futures regulations that would not just impose tougher rules on futures speculators, but would prohibit trade that threatened to cause sharp advances in prices. Even in America, a similar viewpoint appeared with bakers seeking government support for new controls that would help food manufacturers facing higher ingredient costs. Thanks to numerous such assertions that the dramatic gains in wheat prices were due to futures activity related mainly to index trading, the Economic Research Service of the U.S. Department of Agriculture undertook a comprehensive study aimed at identifying exactly what was at work. In effect, the ERS was responding to a broad range of serious concerns claiming that speculation was boosting food prices. The ERS study happily concludes that as trying as the price moves might have been, it was bullish demand and supply surprises affecting market fundamentals that drove the advances. Coming to such a conclusion, which may disappoint many people hoping for expanded limits on speculative activity in wheat futures, required the ERS to enlist well regarded economists and similar professionals to conduct what is named "Deconstructing Wheat Price Spikes: A Model of Supply and Demand, Financial Speculation, and Commodity Price Comovement." If that's not scary enough to the non-professional, consider this explanation of how the study was done: "The study uses a structural vector autoregression (SVAR) econometric model to decompose observed wheat prices into a set of factors and to explain the relative contribution of each factor to observed price changes." When it comes to the set of factors, the study focuses on four that are familiar to everyone concerned with position taking in wheat futures. One is general economic activity and how it affects demand for all com6 modities, especially wheat. Two combines the "passive activity" of commodity index funds as well as speculation by commodity index traders building "baskets" of commodities as investments. Three is precautionary speculation related to expected prices as well as building inventories. Four is supplydemand shocks affecting the wheat market. The study undertook specific measurement of price moves associated with shocks in any one of these factors. In an important salute to reality the impact of each shock was mitigated by prior information about price factors. In an important provision for the study, shocks caused by index traders and speculators were given precedence over others. This means that this trading effect "was given the best chance to reveal itself," the study says. Looking at wheat market moves between 1991 and 2011, the study finds that demandsupply shocks specific to wheat were the dominant causes of price spikes on all three U.S. exchanges. Centering on the wild upturns in February 2008, the study concludes that wheat prices, depending on the market, would have been 40% to 62% lower in the absence of demand-supply shocks. Prices would have been 11% to 36% lower without precautionary demand. Fluctuations associated with global economic activity were credited with a 9% to 12% price impact. In contrast to these findings, the study says that index traders accounted for almost none of the price spike. "The peak price would have been only 1% lower in the absence of shocks attributable to financial speculators," the study declares. Additionally looking at the period between 2006 and 2011, when index funds and associated speculators had their greatest impact, speculation added 5% to 8% to wheat prices. While disproving assertions that speculation, not fundamental surprises, was driving wheat prices, the study underscores futures efficiency. Restrictions like those proposed would never work. Their advocates should now agree that new limits would not prevent price surprises. Morton I. Sosland Editor-in-chief Chairman Publisher Sales Charles Sosland Dan Flavin Adam Ungashick EDITORIAL STAFF Editor-in-Chief Editor Managing Editor World-Grain.com Editor European Editor China Consultant Designer Morton I. Sosland Arvin Donley Meyer Sosland Susan Reidy Chris Lyddon Fengcheng Wang Ryan Alcantara PUBLISHING STAFF Vice-Chairman L. Joshua Sosland President and Publishing Director Mark Sabo Vice-President and Chief Financial Officer Melanie Hepperly Audience Development Director Don Keating Director of On-line Advertising and Promotions Carrie Fluegge Promotions Manager Lon Davis Director of e-Business Jon Hall Advertising Manager Advertising Coordinator Advertising Materials Coordinator Digital Systems Analyst Circulation Manager Nora Wages Sharon Alexander Debbie Maniez Marj Potts Judith Tinburg WORLD GRAIN (ISSN 0745-8991) Volume 32, issue 8, is published monthly by Sosland Publishing Co., 4800 Main Street, Suite 100, Kansas City, MO 64112 U.S. Periodicals postage paid at Kansas City, MO 64108 U.S. and additional mailing offices. Canada Post International Publications Mail (Canada Distribution) Sales Agreement Number 40612608. Send returns (Canada) to Pitney Bowes International, P.O. Box 25542, London, ON, N6C 6B2. Printed in the USA. POSTMASTER: Send address changes to WORLD GRAIN, PO Box 324, Congers, NY 10920-0324. © Sosland Publishing Co. All rights reserved. Reproduction of the whole or any part of the contents without written permission is prohibited. WORLD GRAIN assumes no responsibility for the validity of claims in items reported. Sosland Publishing Co. is a division of Sosland Companies. Inc. Editorial and advertising inquiries should be directed to our world headquarters at 4800 Main St., Suite 100, Kansas City, Missouri 64112 U.S. Tel: 1-816-756-1000, Fax: 1-816-756-0494 or E-mail worldgrain@sosland.com. Requests for reprints of articles should be sent to reprints@sosland.com or call 1-816-756-1000. August 2014 / World Grain / www.World-Grain.com http://www.World-Grain.com http://www.World-Grain.com

Table of Contents for the Digital Edition of World Grain - August 2014

World Grain - August 2014
Table of Contents
From the Editor-in-chief - Fundamentals drive wheat prices
Calendar of Events
Latin American milling conferences
News Review - Interflour to build flour mill in Philippine free-trade zone
San Miguel to double flour milling capacity
ADM Milling completes expansion in Indiana
Bartlett building grain facility in Kansas
Cargill to build grain facility in Arkansas
Grupo Bimbo acquires Ecuadorean baker
Didion Milling names vice-president, business development
GrainCorp buys stake in Egyptian flour miller
Egypt purchases 5.1 million tonnes of wheat in 2013-14
United Grain plans bigger expansion at port
E.U. feed groups want decision on GMs
Toepfer renamed ADM Germany
E.U., EIB to work together on agriculture
Uzbekistan harvests record 8 million tonnes of grain
Ungashick joins World Grain sales team
E.U. sets import duty for first time in nearly four years
CHS earnings up 51% in third quarter
CHS makes management changes
Ardent Mills selects office location
Grain Market Review - Coarse grains
Country Focus - South Africa
Feature - Dawn of a New Era
Ardent Mills partners, executives, bring deep roots in flour milling
Regional Review - A Vital Grain Producer
Regional Review - Overflowing with Oilseeds
Regional Review - Export Challenges
Feature - Using Corn as a 'Lifeline'
LifeLine products
Technical Profile - Demanding the best
Feature - A Growing Issue
Feed Operations - Pellet Mills
Feature - Debugging your facility
Species spotted
Guest Commentary - Unforgettable: How flour saved Berlin
Feature - Olam's rice nucleus program
Rice Quarterly - UN sets acceptable levels of arsenic in rice
New rice mill planned for Arkansas
Italy wants ‘fairer’ rice deal
Thailand province developing jasmine rice
Thailand’s rice price shoots up on drought
Supplier News
Product Showcase
World Grain Archive
Ad Index/Fax Back Program

World Grain - August 2014

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