Kub's Den

On a planet where there is such an oppressively large amount of wheat, that over a third of it won't even be used in the current marketing year and will instead remain as leftover inventory in storage, it's insane that Minneapolis wheat futures have rallied 55% over the past two months, right? Right?

No, not if you consider the extraordinary lengths that U.S. millers will have to go to in order to replace their usual supplies of high-protein milling wheat (the kind of wheat that is exclusively represented by the Minneapolis futures contracts). If the stuff isn't here where it's needed, then it hardly matters how much of it exists anywhere else. Spring wheat acreage is already down 6% year over year, and now due to the ongoing drought in the Northern Plains of the U.S., the remaining fields will yield quite poorly, if they haven't already been zeroed out and baled up or grazed. End users must face a practical, logistical reality before they can obtain some spring wheat -- they must pay dearly for it, and pay at least as much as it would cost to bring in international substitutes. Price rationing will ensure that only the most serious buyers get their hands on the limited supply.

So this is just the latest vivid example of how one little pocket of limited grain supply can cause a price spike, even while the rest of the world is awash in grain.

There are many calories available in the world right now -- lots of feed grains and lots of cereal grains. No person in America will starve because of this drought in the Dakotas (although there are thousands of cattle on pretty grim pasture at the moment). Grocery shoppers can eat Corn Pops instead of Wheaties for breakfast for a year or so, if it comes to that. There will be no Arab Spring on the streets of Fargo just because this year's crop failed.

But human disasters do occur when food commodities get shut off from their end users, and a recent report from Chatham House, a British thinktank, warns that such disasters may be looming on the horizon if policy makers don't do more serious analysis about the supply chain logistics of food commodities.

"Supply chains are only as reliable as their weakest links, and the most critical parts of the international food transport network are the junctures," according to the report's authors Rob Bailey and Laura Wellesley, who go on to identify 14 major international "chokepoints" along shipping routes and overland trade routes, where global food trade is especially vulnerable to disruption (listed below).

Picture this: In August, a hurricane as fierce as Katrina takes out U.S. exports from the Gulf of Mexico. At the same time, extreme rainfall makes Brazil's roads impassable. At the same time, a major heatwave interrupts the Russian wheat harvest. That's a possible scenario suggested in the Chatham House report released last week, titled "Chokepoints and Vulnerabilities in Global Food Trade*." If those events did coincide, the authors calculate that over 40% of the global corn supply, and up to 50% of the global soybean supply, could be affected. It wouldn't matter if the global stocks-to-use ratio looked perfectly comfortable on paper. If the soybeans couldn't get to the end users that needed them -- the Asian swine and poultry herds -- then sudden and severe price shocks would occur no matter what the supply-and-demand tables said. Perhaps even more alarming, 18% of the global wheat supply could be halted from shipping, which would affect some very food insecure places in the Middle East and North Africa, where the Arab Spring in 2011 already demonstrated the political danger of hungry populations.

Of the 14 logistical chokepoints identified in the Chatham House report, only one -- the Strait of Gibraltar -- has remained free of shipping disruption between 2002 and 2017. All the others, including the Panama Canal and the U.S. inland waterways and rail network, have had some sort of service blip, which is fine and usually just a typical part of doing business. However, as the Chatham House authors write, "Disruption of any one chokepoint is unlikely to have a serious impact on global food security, but the compounding effect of concurrent trade dislocations at multiple chokepoints could be significant. In a climate-changed world, the risk of such concurrent dislocations is likely to rise."

I see their point. Once you have one chokepoint disruption, a cascade of events could raise the risk of other disruptions in other locations. Sure, those disruptions could come from weather and climate hazards, or, in today's antsy political world, they could be disruptions from violence, or disruptions from political and institutional hazards, including trade restrictions, bureaucratic inefficiencies, and of course, chronic underinvestment in transportation infrastructure.

We, as global consumers, are growing ever-more dependent on commodities shipped through these chokepoints. In the past 15 years, "the share of internationally traded grain and fertilizers passing through at least one of the maritime chokepoints has increased from 43% to 54%," according to the report. And while that may sound most dangerous for low-income food-deficit countries, like Ethiopia and Honduras (which gets 88% of its wheat from the U.S.), and while Americans hate to think of ourselves as "dependent" (especially at this patriotic time of year), keep in mind that over 80% of America's potassium fertilizers are imported, so we too, need free and clear shipping lanes for our inputs, as well as to provide our products to our customers.

For more worst-case scenario catastrophizing, I highly encourage you to check out the full report, including the long and colorful list of examples of past chokepoint disruptions, from heavy fog to Iranian patrol boats firing shots at a cargo ship.

Speaking of "chokepoints" and "vulnerabilities," the U.S. spring wheat crop (such as it is) may not be threatened by any transportation disruptions on the route between its dry fields, and the domestic flour mills. Nevertheless, it is uniquely vulnerable because of the relatively small geographic region where it's grown. All of that region happens to be suffering from drought right now. The localized nature of this drought and this crop -- to say nothing of the U.S. production of dry edible beans, navy beans, pinto beans, canola and flaxseed, all of which are primarily grown in North Dakota -- highlights the danger of logistical coincidences.

Chokepoints critical to global food security:

Chokepoints critical to global food security:
1. U.S. inland waterways and rail network
2. U.S. Gulf Coast ports
3. Panama Canal
4. Brazil's inland road network
5. Brazil's southern ports
6. Dover Strait
7. Strait of Gibraltar
8. Black Sea rail network
9. Black Sea ports
10. Turkish Straits
11. Suez Canal
12. Strait of Bab al-Mandab
13. Strait of Hormuz
14. Strait of Malacca

* Bailey, R., & Wellesley, L. Chokepoints and Vulnerabilities in Global Food Trade. Chatham House Report. Retrieved from https://www.chathamhouse.org/…

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

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