Why Wheat is a Highly Political Commodity
Historically More Political Than Crude Oil
Commodities are global assets. Commodity production occurs in specific areas of the world. This is because some commodities, like metals and minerals, only occur naturally in certain regions. The major copper producer in the world is Chile, as the country is rich in reserves of the red metal. Over half the world's reserves of crude oil are located in the Middle East. More than 60% of the world's cocoa production comes from two West African nations, the Ivory Coast and Ghana. When it comes to many agricultural commodities, production depends on arable land, water supplies and appropriate weather conditions for thriving crops.
Consumption of commodities is widespread. With over 7.3 billion people on earth dependent on commodity staples such as metals, minerals, and food the price and availability of commodities is an important issue for humankind.
The Most Political Raw Materials
Two commodities, crude oil and wheat are probably the most political raw materials in the world. That is because of the world's reliance on these staples. Crude oil is highly political partially because the majority of the world's reserves are located in perhaps the most politically turbulent region of the world, the Middle East. Wheat is a different story. Wheat production occurs all over the globe. The U.S., Canada, Ukraine, Russia, Australia and many other nations on all continents grow wheat.
Wheat is the basic ingredient in bread. Wheat's geopolitical importance is a result of the fact that all people need to eat. The more people in the world, the more important wheat production is.
Issues Affecting Wheat
Wheat production is highly sensitive to weather conditions around the world. Drought, floods or other weather or climate issues can decrease wheat production during crop years. In 2000, the price of wheat was around $2.50 per bushel. Poor crop yields in 2008 lifted the price of over $13 and in 2011; wheat peaked at around $9.50 per bushel. Recently, due to bumper world harvests and favorable growing conditions, the price of wheat has returned to around the $4.60 level as of late February 2016.
In poor countries, when the price of wheat rises because of poor crop yields, like it did in 2008, a decrease in availability and rising bread prices can cause huge political pressure on sitting governments. The Arab Spring in 2010 was partially a result of rising bread prices. If governments are unable to provide food to their citizenry, the results can be disastrous. Therefore, while we often hear about the highly political nature of crude oil, wheat has been a more political commodity on a historical basis.
This is because crude oil's politics are on the supply side and wheat's political issues generally focus on the demand side of the fundamental equation.
Demographics or increasing population around the world is one of the biggest issues facing wheat. When I was born in 1959, there were less than three billion people on planet earth. In 56 years, world population has swelled to almost 7.4 billion. As such, the demand for food, for bread, has more than doubled over the last half-century.
Since 2012, the last time crop issues causing lower supplies and higher prices affected the wheat crop, the price of the grain has been moving lower. However, when it comes to the wheat market every year is a new adventure. No one but Mother Nature knows what weather conditions will bring each year. In 2015/2016, the strongest El Nino since 1997 did little to affect wheat output. It is possible that this climate event will still influence wheat production in countries like Australia in 2016. Moreover, a La Nina could cause issues in 2016 or the years ahead.
When it comes to commodities like wheat, storage is an issue. Crude oil, copper, iron ore, gold and other commodities can remain in stockpiles for years if not decades when surplus conditions occur. Agricultural commodities like wheat have a limited shelf life as they deteriorate, lose protein content and rot or disintegrate over time. Therefore, the prices of grains and most importantly wheat can be highly volatile and subject to huge price swings on a year-on-year basis.
Most people on earth count on bread as a staple in their diets. This makes wheat the most political commodity in the world. No one around the world thinks much about their daily bread when it is readily available but when supplies run low or prices skyrocket, watch out. Wheat has been the root cause of revolution and civil problems for centuries and that is not likely to change any time soon and may intensify in the years ahead as world population continues to grow and the world becomes more dependent on bumper crops.