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In the world of investing, history plays a larger role than most speculators believe. Understanding the past allows us to better predict the future, which in turn makes us more successful investors. No where is this fact more true than in the analysis of agricultural commodities. Many of these commodities have experienced booms and busts in relation to political turmoil in regions where they are most heavily grown. Russia's large land mass and arid, cold climate make it a hostile environment for most crops. Wheat, however thrives under these conditions and before the institution of communism into Russia, the region around the Black Sea was considered the breadbasket of EurAsia. In fact, it was the Russians who first brought wheat to the United States in the mid 19th century. When Stalin came to power in Russia, he brought farms under governmental control and punished any landowners who would revolt against him. A large portion of Ukrainian wheat farmers, having been autonomous for quite some time, did not take kindly to Stalin's propositions and were executed for their anti-communist stances. As time progressed, many Soviet fields failed to take advantage of crop rotations and emerging technologies, causing yields to decrease. While still the main crop of the Russian diet, the USSR eventually became the world's leading importer of wheat, as it could not produce enough of it to feed its own people.
With the fall of communism, private landowners have started to work the fields surrounding the Black Sea in Ukraine, Kazhakstan, and Russia, increasing their output tremendously. While the yields are much lower and the technology much older compared to developed countries, these regions are still able to produce wheat at 1/3 to 1/2 the cost of most other places. Its proximity to the Asian market provides automatic demand, as farmers are able to enjoy nice profits even compared to the heavily subsidized farmers in Australia and the US. In a short amount of time, the three countries of Ukraine, Kazhakstan, and Russia now produce 11% of the world's wheat exports, and within 10 years, this number may be well over 20%. In addition, Romania has become another major player in the market, despite the relative youth of that industry in Romania. Just 20 years ago, the United States produced 50% of the world's wheat. Today, that number is 25%, and shrinking every year. With the emergence of the Black Sea region into this market, growers in developed countries may be faced with continuing pricing pressures and market share loss. Already at low levels, increases in Russian yields are inevitable and may one day flood the market with wheat. At this point, The Commodity Investor is taking a neutral stance on wheat. While it will participate in the eventual dollar decline, the fundamentals of the commodity are neutral to bearish. This is best owned in commodity pool/fund such as the one developed by Jim Rogers. |
