Friday, August 06, 2010

Finest Wheat

“I won’t envy them virginity;
Let them be white bread of finest wheat,
And let us wives be called Barley Bread.”

Geoffrey Chaucer
The Wife of Bath
Canterbury Tales

Last week the International Grains Council lowered its estimated wheat production in the crop year 2010-2011. The U.N. is now looking for 651 million metric tons in the current production year, down from the 680 million to 685 million range in years past. The world consumes about 640 million to 650 million metric tons per year, so the already low wheat stores are not likely to be replenished this year.

The gloomy prognostication was issued on the heels of crop failures in Canada and the Black Sea region. The latter area has become more important in the world of wheat as the Russian Federation is among the top four wheat producers in the world and exports as much as 10% of its total yield. With Russia choosing to stop exports of food crops, there will be pressure on world supplies. Canada is not among the top producers in the world, but is the third largest exporter, shipping out as much as 60% of its total crop.

Most investors probably see the wheat crop loss as a food chain issue and are girding themselves for higher bread and pasta prices in the coming year. That would be a bit short sighted as the golden grains are found in several other sectors, where a hike in prices could pinch profit margins.

For example, papermaking requires wheat starch, which can represent as much as 8% of the paper content. Wheat is among other starch sources used in clothing starch, baby powder and glue for corrugated board. Wheat starch is also used as a stabilizing agent in pharmaceuticals. A significant uptick in prices could impact profit margins among producers of these products if alternative starch supplies are not available.

The alternative energy and chemicals industries will also be impacted. Wheat is used as feedstock for biofuel production in Europe and Canada. Specialty chemical producers are also experimenting with wheat starch as a substitute for petroleum based polymers for use in for biodegradable plastics.

China, India and the United States are the top three wheat growers, accounting for a little more than a third of the world’s wheat production. However, the farmers in U.S. are the mostly likely to benefit from higher wheat prices as the U.S. is the top wheat exporter in the world. U.S. farmers sell as much as 55% of the U.S. wheat crop.

Wheat producers are private companies or family farm operations, leaving most minority investors like you and meet at the side of the field. The most accessible investment vehicle to make a “wheat play” is in some of the farm products producers, such as fertilizer and pesticide producer BASF (BASFY: Nasdaq), tractor supplier Deere and Company (DE: Nasdaq) or seed and fertilizer producer Monsanto (MON: NYSE). A note of caution, as all three of these stocks are expected to continue trading primarily on factors other than the fortunes of the wheat crop.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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