An article today in The Wall Street Journal highlights the latest rise in the price of wheat. Blaming bad weather, it notes that the “global wheat market is caught between freezing winds and a sirocco.”
The WSJ therefore warns that “investors should beware of whiplash as weather normalizes.” Given that wheat is “up 13% since the start of December”, it is good advice – if weather were to blame.
The reality is that wheat is being driven higher by more than bad weather. The price of wheat has been climbing since June, a fact conveniently ignored in the WSJ article, perhaps because it doesn’t square with its premise that bad weather is causing higher wheat prices. Are we to believe that the market knew seven months ago that weather around the world today would be so bad that it would impact global wheat output? Or has wheat – which has risen $3.50 per bushel, or 70%, since its June low – been climbing steadily higher over these several months for another reason? And more to the point, why are all commodity prices rising?
For example, since June copper has risen $1.70 per pound, or 59%. Is bad weather to blame?
And it ain’t just wheat and copper that have skyrocketed. Bad weather can’t explain the simultaneous explosion in prices for non-agricultural commodities like palladium or heating oil over the last year.
This is what happens when central banks promote loose money and low interest rates. All of that money chases investments and everything goes up.
Notice what didn’t go up in value: money. The US dollar (USD) and the Euro (EUR) are at the bottom of the chart. They lost value in 2010.
If you’re worried about rising commodity prices, one way to hedge is to invest in precious metals, which tend to keep place with commodity inflation (CRB is the CRB Continuing Commodity Index):