Market News & Headlines >> Fundamentals, Not Speculators, Drive Wheat Prices

A group of agricultural economists recently released a study of wheat price spikes and their causes. The bottom line to the 51 page report: Supply/demand imbalance overwhelmingly overrides other potential causes, including commodity index traders.

The study looked at price spikes between 1991 and 2011 in the three U.S. wheat futures markets and paid special attention to the one in February 2008, when Minneapolis futures soared from about $8 to $24. It credited the 2007/08 crop-year supply/demand shocks, such as bad weather, with 40-62% of the price action, depending which market you are looking at. Another 11-36% of the price action was tied to “precautionary demand shocks” Such as buying ahead ahead to ensure supplies.

In contrast, financial speculators such commodity index traders added only 1% to the price, the researchers found. “Even at its maximum price impact between 2006 and 2011, financial speculation increased wheat prices by only 5-8%,” according to the report. “These findings suggest that wheat futures markets have performed efficiently in the sense that wheat futures prices have reflected fundamental factors. Consequently, restrictions on commodity index trading are not likely to prevent future price spikes.”

For the full report from Joseph P. Janzen, Montana State University; Colin A., Carter and Aaron D. Smith, University of California-Davis; and Michael K. Adjemian at USDA/ERS, click here.