Font size: 
The reasons for this lie in the exporting nations' desire to get more for their produce. Historically exporters like the United States, Argentina, Canada and Australia plant much more wheat than they consume. The surplus is sold in commodity markets and helps to feed the world. This surplus has kept wheat affordable for the last 40 years.
U.S. wheat saved India from starvation from 1966-68. Argentinean, Canadian and Australian wheat saved China from its long shortages from 1955-1975.
If you have land, water, fertilizer and the will to grow wheat, then it is the easiest agricultural product to grow. Good weather and good soil help to increase the yield.
The exporting countries in the last 60 years have been growing a large surplus; hence a few changes in weather never impacted exports or consumption. But in the same period the population on this earth has almost tripled. It has depleted all the surplus stock. One or two bad weather seasons results in wheat shortages. This has happened in three seasons from 2005-08, resulting in huge price increases.
World wheat production in the 2006-07 growing season was 593 million tons. This was lower by 35 million tons from the record harvest season of 2003-04 of 628 million tons.
The forecast for 2007-08 is about 614 million tons, while expected consumption is about 625 million tons -- leaving a 10-11 million ton shortfall.
This shortfall can be met without starvation from buffer stocks, but the point is that the world can become very vulnerable to a small drop in production. Today's price rise is a direct result of this shortfall.
India and China are the big importers. China has been importing 5 to 7 million tons of wheat every year and India 3 to 5 million tons. Both have paid less attention to agriculture in the last 10 years, and production has stagnated. China produced about 98 million tons of wheat in the 2006-07 season, which is about 4 million tons lower than the 2005-06 season.
Yet consumption has stayed at about 104-105 million tons, forcing China to import 5 to 7 million tons in the last three years. China found importing wheat to be easier than diverting attention from its current fad of industrialization. A key reason was that wheat was cheap in the international market.
India is in a similar state. Three bad growing seasons from 2005-06 cut wheat production by 3 to 5 million tons, hence imports were ordered. Output in 2005-06 and 2006-07 stayed at about 73 million tons and the shortfall was imported. This year's La Nina affect on world weather systems has resulted in timely rains in India's wheat-growing belt, so wheat output for 2007-08 is expected to be a record, more than 76 million tons. Hence fewer or no imports have been ordered. The central reserve stock in India of about 11 to 12 million tons of wheat, which was running low, will be replenished with the current bountiful harvest.
Reports have been released by growing nations like Australia, Canada and the United States of adverse weather conditions in their wheat-growing belts, however. Traders reacted fast and furiously and began boosting prices. At the end of last year wheat futures traded at US$22 a bushel. But there was one catch -- the traders had not factored in the possibility of good crops in India and China.
If India imports no wheat and China cuts its imports by half, then supply and demand will be in balance for 2007-08. Wheat traders will have a tough time justifying a threefold increase in prices, and prices are likely to tumble.
First to feel the impact of the sudden increase in wheat prices were the United States and Canada. Prices of bread, pasta, milk -- from cows that use grain as feed -- and meat began escalating in the last seven months. Milk prices shot up by 17 percent and bread and pasta prices are up 50 percent. Part of the reason for the extraordinary jump in the United States is that bread is made from superior quality durum wheat. Its output has been impacted badly by bad weather.
Weather is the single largest factor that impacts crops in developing countries. Greatest of all are the El Nino and La Nina cycles of rising and cooling of the Pacific Ocean along the coast of South America. Although these impacts have not been quantified, it is believed that La Nina impacts rain and monsoon patterns in Asia. Generally with La Nina adequate rain falls on the wheat-growing regions in India, Pakistan and China. El Nina brings good weather to continental North America, Australia and Argentina. The future two to three years may be good for these countries.
The 2007-08 growing season is a La Nina year. Enough rain has fallen in India and China for record crops. But not enough rain has fallen in the U.S. and Australian wheat belts, where crop estimates are a bit lower. La Nina and El Nino alternate roughly over five years. Meteorological studies on their affects are still incomplete, and there is no certainty concerning these cycles in coming years. Food shortages or surpluses will be a roll of the dice.
But none of these factors will affect the increased food needs of the rising population.
The world had 2.5 billion mouths to feed in 1950. Today there are 6.7 billion. There was plenty of land, water and other agricultural input to grow food in 1950 -- with some poor counties excepted. Today, with roughly the same amount of land, with increased irrigation and better seeds and other agricultural input, food production has tripled. So has the population. If population increases continue unabated, and there is no more land to grow additional food, severe food shortages are forthcoming. Exporting counties will reap the benefit of increased prices.
China at the moment is in a self-destruct mode, with good agricultural land being transformed for industrial use or taken over for urban sprawl. The rest is being slowly destroyed by acid rain as a direct result of the excessive burning of low-grade coal.
China thought it cheaper to import wheat and other foodstuffs at the previously prevailing prices. Not any more. With prices tripling, less land at its disposal and the weather playing havoc, there is less likelihood that China will be able to balance its supply and demand. Hence imports will continue. This is bad news for other importers as prices are likely to stay high.
India is even worse off. Population growth is out of control, and farmers are switching to cash crops instead of growing wheat and other staple grains. This tends to reduce output, especially if the weather does not cooperate in a particular year. All of these factors helped reduce output in the previous three years, until this year. Things may change now as the price of wheat in the international market has tripled. The government may find it easier to raise its support and encourage farmers to grow more wheat.
In summary, the rise of wheat prices in the international market should be an eye-opener for the importing countries. It is driven by the higher demand from a rising population. Wheat supplies are not maintaining pace because of the vagaries of weather, the bad management of productive land in importing counties and the plain simple greed of exporters in the producing countries. Spot shortages are likely to continue, which will exacerbate the situation from time to time.
