Tuesday, September 4, 2007

Wheat Prices Surge

One of the main problems I have with Fed policy is their annoying reliance on core inflation as a primary inflation indicator. This is fine when food and energy prices are rising on a regular basis. But with India and China growing at high levels, it's not too off-the-wall to think basic commodities like food and energy will have continuing price increases.

Here is the latest from the wheat market:

Wheat prices piled on 30 cents a bushel within the first minutes of trading -- the maximum limit permitted by the Chicago Board of Trade -- and rose to an all-time high of $8.055 a bushel. Wheat has been trading in record territory for weeks amid worsening supply concerns. Poor weather ravaged crops in the U.S., Europe and the Black Sea region this year, and now conditions in the Southern Hemisphere as it enters the growing season don't seem much better. At the same time, high market prices haven't deterred global demand.

Here's a weekly chart of wheat which goes back a few years. Notice how prices are increasing at a fairly consistent rate.

Here's a monthly chart. Notice how we're clearly in new pricing territory.

Most importantly, here's a chart of the Goldman Sachs Agricultural price index. Notice that wheat prices aren't the only prices increasing -- it's happening across the agricultural price spectrum.