Wheat prices exploded by an unheard of 6.34 percent on Monday, continuing a record surge of 38 percent in July, with even more speculators drawn by gloomy news even though the fundamental situation remains stable.
For instance, July was the hottest month in Russia -- the world's third-largest wheat exporter -- since record-keeping commenced over 130 years ago, with deadly forest fires causing more than 30 deaths. Moreover, large parts of the wheat harvest are being destroyed. The expected amount available for export by Russia has been nearly halved, and could fall further if the drought continues.
Other regions have also been struck by adverse weather conditions.
Prices in the US closed at $6.9975 per bushel on Monday (the price for the past 52 weeks have ranged from a low of $4.2625 to an intra-day high of $7.0725.
The price for wheat futures on European markets (for November delivery) climbed to more than 200 euros per ton for the first time since late spring-early summer of 2008
In Europe, the second largest supplier of wheat for the world market, several countries like Poland or Germany were also experiencing unusually dry and hot weather, lowering the expected wheat harvest considerably. Output in Canada will be lowered by 17 percent due to strong rains during the seeding period, according to the International Grains Council (IGC).
However, the lowered wheat output is merely bringing the world production in line with projected consumption, according to numbers from the most recent Grain Market Report by the IGC from July 29.
The vast global reserves of around 200 million tons of wheat will remain pretty much untouched. Even a permanent destruction of farmland by the severe drought and fires in Russia wouldn't affect the fundamentals at all, say analysts who see abundant potential for flexible adjustments if there is room for more wheat production.
The most recent price explosion has therefore only been driven by speculation based on bad news and a moderate downwards adjustment in the expected harvest volume for this year.
Analysts expect more 'hot money' rushing into the market when additional bad news comes in, but prices will likely eventually top out and come back down to fundamentally justified levels.