HardAssetsInvestor

Written by Julian Murdoch  |

March 30, 2009

Gaming Grains

Details

With the flooding in Fargo swamping wheat and the USDA prospective plantings on tap, HAI examines the outlook for corn, soybeans and wheat.

• Why the massive flood isn't moving prices
• The global wheat glut
• Soybean fever

The Red River Valley got slammed with rain last week. Combined with snowmelt from unseasonably warm temperatures, the rains have set the Red River up for massive flooding.

Aside from being the setting of the Coen brother's classic, Fargo, the Red River Valley is also home to vast acres of farmland from Minnesota to North Dakota. A few Lonely Planet-style facts about the area:

• North Dakota is the top state for spring wheat production in the country: 45% of U.S. spring wheat comes from the state.
• Of the 246.4 million bushels that were grown there in 2008, about half of that comes from the eastern part of the state - right in and around the Red River Valley. (If you're keeping track, that means the Red River is a bit less than 25% of U.S. spring wheat.)
• No. 2 for spring wheat production is Minnesota, which produced 18% (or 100.8 million bushels) of U.S. spring wheat. Almost all of that wheat is grown in the northwestern corner of the state (in other words, right on the Red River).

Normally, one would think that the threat of severe flooding (potentially 500,000 acres of growing land could end up underwater) would boost agricultural commodity prices because of the threat to supply. But instead, the price of wheat fell on weather-related news. Why?

First of all, there are two separate crops of wheat in the news right now. There is the winter wheat that was sown last fall and is beginning to sprout and grow. The areas where this wheat is growing (primarily in the U.S. southern plains) have actually welcomed the rain - given the stage of the growth cycle, the rain that part of the country has experienced is helpful to the crop.

The area along the Red River Valley, which extends from Minnesota, through North Dakota and up into Canada, grows spring wheat. Spring wheat is planted sometime between April and May, depending on the moisture in the ground and temperature. Too much rain and snowmelt here delays spring planting. If the delay is long enough, the crop doesn't have time to mature for harvesting, leading to greatly reduced yields or even occasional crop failure. And given the general flatness of the area, overland flooding can take a long time to recede - the last flood in 1997 took weeks to recede.

So the supply shock is potentially very real.

Hard Spring Wheat, (MW, MGE)

But throughout the week, spring wheat, traded on the Minneapolis Grain Exchange, fell 5% from 639.25 cents per bushel on Monday to close at 607.75 cents per bushel on Friday.

The lead balloon isn't totally irrational - wheat is a global commodity. While spring wheat is popular for breads because of its protein content (something bakers worry about), it's not all that unique, and wheat is easily fungible. Ultimately, it is the overall global supply of wheat that is most important for price movements, and right now, supply is good. In fact, dominant headlines about the flood last weak echoed Reuters on Friday, "Big global wheat supplies to buffer U.S. flood threat."