Wheat "goes limit up" yet again

Wheat field
May 16, 2022 by Matt McCracken

Disclosure:  We currently own DBA, WEAT, and various wheat futures contracts (ZW and YW) in our client accounts.  

On the news out of India that they will severely curb wheat exports, prices for wheat on the futures exchanges went "limit up" again today.  I believe this is the fourth or fifth time this has happened in the last six months.  Over the weekend, India announced their decision that their own wheat was far more valuable than somebody else's currency and, thus, they would no longer be willing to exchange their wheat for other people's money.  While this is yet another domino to fall in the devasting inflation trend, it was all too predictable.  

Our overriding investment theme is the inconvenient truth that our foreign trading partners will become increasingly more reluctant to exchange their tangible goods for our FIAT currency.  Russia was the first country to completely abandon the USD.  Now, India has decided that one of its most needed commodities is no longer for sale.  India's decision is directed at anyone wanting to buy wheat with a foreign currency but given the USD is the world's reserve currency and the default currency for the international exchange mechanism SWIFT, it's not hard to connect the dots.  What India is really saying is they are no longer willing to exchange wheat for USDs.

Expect more and more of these trade policy decisions to emerge the world over.  And as they do, they will continue to impact inflation.  And thus, it is paramount that investors get on board with this trend.  As Will Rogers said, "Invest in inflation, it is the only thing going up."  For example, most of my clients have about a 7% allocation to wheat prices in some form.   While the increased prices at the grocery store are climbing, their allocation to wheat will offset some or all of the price inflation they see at the check-out line.   A 7% allocation for a million-dollar account in my strategy is currently experiencing a $3,700 gain today solely from their wheat position.  Our YTD gains from wheat exposure are far in excess of any pain they feel at the check-out line.  

Wall Street firms and the financial media are even more behind on the inflation curve than the FED.   Just this morning, I heard a "talking head" on Bloomberg say how the inflation numbers are baked in, the figures will certainly come down over the summer, etc. etc.  And while he is saying this, the ticker tape below him is telling how wheat, one of the most critical components to inflation, is limit up!  Wheat, corn, sugar, gas, cotton, and lumber - these are the most fundamental inputs to inflation.  Inflation cannot subside without price increases in basic commodities leveling off.    

Last week a client sent me an e-mail from a group selling beef saying that prices would go up substantially because of corn price increases in the mid-west and gas prices at the pump.  It's like that old nursery rhyme we learned as kids - "The shin bone is connected to the knee bone and the knee bone is connected to the thigh bone, and the thing bone is connected to the .....".  Inflation works precisely the same way.  Corn prices in Kansas, wheat prices in Ukraine or India, lumber prices in the Northwest, cotton prices in Texas - they all are inextricably linked to one another.  And once the inflationary forces are set in motion, it's darn near impossible to contain them without some sort of drastic, systemic reaction.    As investors, our best hope is to embrace this trend, invest in it accordingly and by doing so, take the sting out of higher inflation.