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Business News/ Opinion / Online-views/  Too much money chases little wheat
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Too much money chases little wheat

Too much money chases little wheat

New markets: A wheat field in Columbia, Illinois. India and China have tamed demand for wheat exports, but emerging markets such as West Asia, North Africa and South-East Asia are purchasing more.Premium

New markets: A wheat field in Columbia, Illinois. India and China have tamed demand for wheat exports, but emerging markets such as West Asia, North Africa and South-East Asia are purchasing more.

Wheat prices are at a record high, twice the level of the year-ago period. For December delivery, the grain rose to $7.54—around Rs310—a bushel in Chicago on 23 August, up 110% in the last 12 months, and more than threefold since 2000. But,

New markets: A wheat field in Columbia, Illinois. India and China have tamed demand for wheat exports, but emerging markets such as West Asia, North Africa and South-East Asia are purchasing more.

For once, the regular suspects—China and India—are not responsible. Indian wheat imports are increasing rapidly, but are still a fairly small factor on the world market. Chinese imports are well down from 2004. The country imported 71,000 tonnes of wheat in January-July 2007, down 80% on the previous year—its peak imports were 1.5 million tonnes in 2003-04. However, other emerging markets—in West Asia, North Africa and South-East Asia—have increased their purchases. Escalating shipping costs—double their level a year ago—have also contributed.

Prices rise when demand cannot be easily met. Wheat and most mined commodities are demonstrating that simple economic rule. Fast world growth, particularly in poor and populous countries, are straining the world’s production and distribution systems for basic goods. It will take several years for supply to catch up.

While waiting, prices are likely to stay as high as necessary to get supply and demand in balance. How high is that? The answer depends largely on how much credit is available. Buyers will borrow as much as they are allowed to in order to get their hands on these basic commodities. Oil prices seem to have peaked for now, but the rocketing price of wheat suggests that credit is still readily available.

The high prices of commodities are directly related to the low prices of many industrial goods. The low-cost labourers who make computers cheap are also the more affluent consumers who push up the global price of bread and oil.

This relationship matters for monetary policy. Central bankers, especially in the US, pay more attention to prices than to money supply. But they like to focus on so-called core inflation, which excludes food and energy. That is an exercise in self-delusion.

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Published: 28 Aug 2007, 02:15 AM IST
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