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It's starting to smell a lot like late 07, early 08.

The agriculture stocks are moving in part of the continued parabolic move in wheat. Not three weeks ago, when I first highlighted it, this index was at 20ish [July 16, 2010: Get Your Wheat On]. Tuesday it had run to $24 [Aug 3, 2010: Wheat Continues to Surge as Russian Droughts Drive Prices] and now 48 hours later we're talking $27s! (Click to enlarge)

Via WSJ:

  • Wheat futures prices soared Thursday to their highest levels in two years after Russia said it would ban grain exports due to a severe drought, a move that heightens concerns about global supplies of the grain and the possible impact on food prices. U.S. wheat futures have gained nearly 85% from a nine-month low in June.
  • The export ban by Russia, a major producer and supplier to other countries, comes after several weeks of deteriorating prospects for the Russian wheat crop. Market participants had speculated in recent days that an export ban was likely, but the full effect of such a possibility clearly hadn't been priced in.
  • The ban, which affects wheat, corn, barley, rye and flour, is set to run from Aug. 15 until the end of the year, according to a spokesman for Russian Prime Minister Vladimir Putin. Traders with existing contracts may ship only through Aug. 15.
  • While most market participants don't foresee the kinds of problems that sparked food riots in 2008, the dramatic increase in prices and the uncertainty over future supplies of the grain have forced buyers and sellers to recalibrate their plans.
  • The ban is "a big deal" because the former Soviet Union has emerged as a major exporter on the world market, said Jerry Gidel, analyst at North America Risk Management Services, a brokerage in Chicago.
  • Ukraine, another major exporter, also has canceled several wheat export contracts due to lack of supply from farmers and other issues, trading executives said. The news heightened fears about tightening supplies because export restrictions in the former Soviet Union helped shove prices to record high prices in early 2008.

Ironically, the move in wheat is helping other grains:

  • The wheat supply concerns are spurring price increases for other grains too. September corn futures in Chicago hit a seven-month high, rising 6.2% to $4.25 a bushel. Corn and wheat are linked because both grains are used for animal feed. When wheat locks up at the exchange-imposed limit, traders who want to buy grain futures will likely look to CBOT corn and soybeans.

This should pressure margins for almost all companies that deal in wheat, especially if they have not hedged their purchase agreements, as the ability to pass on price increases to the end consumer is poor. To repeat what I wrote in those earlier posts, the easier secnnd derivative plays are the fertilizer stocks, although if this continues names like Bunge (NYSE:BG), Deere (NYSE:DE), Archer Daniels Midland (NYSE:ADM) will be all over the hedgies screens.

While the wheat move is breathtaking, when commodities reverse it is jaw dropping.

Should be a very good year for America's wheat producers.

Disclosure: No positions

Original article

Source: What Russia's Wheat Export Ban Means for Agriculture Stocks