Riots in Egypt and the Price of Wheat

Includes: DBA, GRU, JJA, JJG, RJA
by: Roger Nusbaum

You probably have heard about the riots going on in Egypt over the rising price and rationing of bread (wheat).

I only know what I read (here and here). Knowing what is really happening there is difficult - as a function of being far away and news accounts not always correctly capturing the essence of these things.

It is much easier to understand that part of what is causing the problem is a distortion of some sort in the price of soft and agricultural commodities. I say "some sort" because quantifying the distortion is not really the point and I doubt I am the person to do it. I think successful navigation is more important than successfully quantifying such an event.

Wild, wild price action, regardless of direction, happens every so often and the most important thing for most folks is simply to recognize something is not right and if something is not right in a serious manner then the chance of consequences in other seemingly unrelated markets is quite high.

A year ago rough rice was trading around 11. It started 2008 in the 13s. The July 2008 contract now appears to be above 20.

The chart is of the Wheat ETC (WEAT.L) traded in the UK. It started the year at 5, up to 7 and now back below 5.

The action is wild and creates visibility for problems in other markets either directly or as some sort of secondary effect.

In addition to the commodity markets being a little cattywhompus so is the bond market. Yields are absurdly low. Either yields stay very low which causes one set of problems or we see a violent run up in yields (like in July 2003) which causes another set of problems. An orderly correction is rare event.

I'll leave predicting what all this means and what it will domino into for the smart guys in the room. It is more useful to know risk is heightened both in places where we expect it (stocks and commodities) and where we don't (bonds and money markets).

The rioting will hopefully end very soon but the market events triggering the riots could have fallout for quite a few months (some will say longer) and so continued defensive posturing seems to be right. If this thought turns out to be wrong then obviously the world will be better off.