Friday, June 26, 2009

Wheat Prices to Soar: Ug99 Fungus Spreading All Over the World

Ug99 is a destructive fungus that threatens to wipe out 80% of the world's wheat crop. Scientists in Canada and around the world are trying to develop resistant wheat strains resistant to this fungus that has spread from Africa to Iran and is likely to show up soon in India and Pakistan, and from there to the rest of the world.

The stem, black or cereal rusts are caused by the fungus Puccinia graminis.

Destruction of wheat crops threatens to cause widespread famine. It may also cause a very large increase in the prices of staples such as bread and pasta.

The Ug99 fungus, also known as stem rust, is likely to spread worldwide, either through wind-blown spores or carried by people. "It's a time bomb," Jim Peterson, an expert on wheat genetics at Oregon State University in Corvallis, told the Los Angeles Times. "It moves in the air, it can move in clothing on an airplane. We know it's going to be here. It's a matter of how long it's going to take."

"I think it is important people start recognizing what a big threat this is. This could mean world famine. This is quite the deal", said Rob Graf, a research scientist with the Agri-Food Canada's Research Center in Lethbridge, Alberta.

The UN also says Ug99 is a major threat to world food security.

Stem rust is a long time foe of wheat farmers and afflicted wheat's wild ancestors before that. The most recent outbreak in the US was in 1962 when over 5% of the crop was killed.

Resistant strains of wheat apparently overcame the problem. But a new strain appeared in Uganda in 1999 and began spreading from there. Ug99 is a strain of black stem rust. It is virulent to the great majority of wheat varieties. Unlike other rusts, which only partially affect crop yields, UG99 can bring 100% crop loss. Up to 80% yield losses were recently recorded in Kenya.



Wheat trades on the Chicago Board of Trade (CBOT), under symbol W. Current prices:

Where wheat is produced (courtesy wikinvest):

(click to enlarge)

From an investment point of view, a couple of companies and ETFs that I follow that are are directly related to wheat are:


This ETF tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities: corn, wheat, soy beans and sugar.

DBA is currently close to oversold, with ab RSI7 is 38.8 and RSI14 is 43.0.


Formerly Saskatchewan Wheat Pool. The Company is organized into five segments: Grain Handling and Marketing, Agri-products, Agri-food Processing, Livestock Feed and Services, and Financial Products. The Grain Handling and Marketing segment is engaged in the collection of grain, shipping to inland or port terminals, cleaning of grain to meet regulatory specifications, and sales to domestic or export markets. The Agri-products segment includes an ownership interest in a fertilizer manufacturer and ownership of a fertilizer distributor. The Agri-food Processing segment includes the manufacture and marketing of products associated with oats and malt barley for domestic and export markets. The Livestock Feed and Services segment formulates and manufactures feed products.'s RSI7 is 49.1

Companies that will suffer from high wheat prices:

Being a global commodity, wheat is used for many foods, bread and pasta in the West countries and noodles in Asia. If the commodity prices increase, the usual consequence is that food producing companies are faced with a dilemma of lowering margins or passing on cost increases to the consumer. If the latter occurs, demand is destroyed. Bottom line is that company profits will suffer.

Sara Lee (SLE) and Campbell Soup (CPB) are both producers of baked goods, especially bread.

Kellogg (K), General Mills (GIS), Kraft Foods (KFT), PepsiCo's (PEP) Quaker Foods, and Nestle (VTX:NESN) are all major producers of breakfast cereals, most of which are made partly from wheat.

Kraft Foods and PepsiCo's Frito-Lay are the largest multinational snack companies. Many of the products manufactured by these companies, including corn chips, cookies, and crackers, are made primarily of grain products.

More to come.

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