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Wheat prices continue to reach record highs
THE price of wheat continued its strong run yesterday, hitting fresh record highs for the second time this week and adding fuel to the nervousness about food inflation.

"Rising wheat prices are a worldwide phenomenon with Chicago also at all-time highs," said Rod Gravelet-Blondin, head of agricultural products at the JSE. "Argentina and Australia had bad crops (due to drought) and there is now a worry about US crops."

Having spent a number of years hovering between R1200 and R1500 a ton, the wheat price has shot up this year to peak yesterday at R3182 a ton for December delivery as worldwide stockpiles neared 25-year lows.

Gravelet-Blondin said the fact that prices had risen by their daily limit yesterday indicated a strong upward trend still existed.

"It means inflation could stay above 6% for longer," said Azar Jammine, chief economist at Econometrix, referring to SA's inflation targeting regime which aims to contain consumer inflation within a 3%-to-6% band. SA has missed the target for four consecutive months.

Jammine said instead of inflation possibly dipping below 6% in the second quarter of next year, we might have to wait until the third or fourth quarter thanks to the rising price of wheat.

Prices of bread, which Gravelet-Blondin described as the foodstuff of the nation, will suffer the most obvious impact. SA, which is the third-largest wheat producer in Africa, usually grows about 2-million tons of wheat and imports another 2-million tons. SA should not run short of bread, because as Gravelet-Blondin says, if you have the cash you can do just about anything, but millers may have to source lower-quality wheat.

Unfortunately, SA cannot easily plant more wheat. Grown in Western Cape and eastern Free State, the crop needs specific weather conditions to flourish.

The rocketing prices were an indication of how much the futures markets were driven by fundamentals, Gravelet-Blondin said.

Maize prices have been high this year but are off their peaks. Nonetheless, SA has produced an estimated 6-million tons as compared with the average 8- to 10-million tons.

"I'm starting to get pessimistic," said Jammine. He was worried that food prices would keep inflation higher for longer and then the pressures of 2010 would come along and add to the inflationary woes.

Another question gaining momentum is whether or not the Reserve Bank will raise interest rates because of the prices of wheat and maize. As Jammine pointed out, a group of Harvard economists have argued that countries such as SA should be more flexible about inflation targeting and not raise rates in response to prices (such as the price of wheat) that they cannot control.

If wheat prices were to stabilise, their inflationary effect would have washed through the economy a year from now. If inflation is going to go below 6% thereafter, asked Jammine, then why raise rates now, keeping the rand strong and inhibiting job creation? Jammine was fairly confident that the central bank was keen on this line of argument.
MGR Archive 16.9.2007
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