Wheat investors had better get hold of an economics dictionary.

To add an understanding of the intricacies of quantitative easing to those of hagberg numbers and gluten levels.

Who says? The US bond market, which appears to be calling a lot of the shots on grain prices.

To get a grip on what what's moving wheat may – like-it-or-not – mean grasping how well America is doing in getting shot of recession without inviting in too much inflation.

Mind the gap

Food commodity markets have typically swayed to similar rhythms as inflation.

After all, they contribute a big chunk to retail price indices. And one way for investors to avoid being left behind by inflation is to jump aboard one of the locomotives that is pulling it.

But the correlation between wheat prices and expectations for inflation has been remarkable this year - as shown by moves in the gap between yields on so-called Tips bonds, whose payday terms change with moves in retail prices, and those on conventional equivalents.

Hand in hand

This gap, one of the most widely-used measures for gauging what bond investors are thinking on inflation, shows that deflation was seen as the bigger enemy at the start of the year, with price rises only becoming the bigger concern in April.

Inflation concerns then peaked in May, when vertigo set in, a pattern that may feel familiar to wheat investors.

As well it should. Chicago wheat prices have moved hand in hand with inflation perceptions this year, even down to delicate skips at the start of July.

Sure there is one difference, of magnitude - wheat prices have fallen further from their peak, ending up near March levels.

But that may not be entirely surprising, given the concerns which flared up of botched US regulation which have driven many investors from the wheat market.

Difference kind of climate 

It would not be at all surprising if the two graphs continue moving in tandem.  

Unlike, say, corn or soybeans, where tighter stocks mean changes in crop forecasts hold a bigger impact, wheat looks less likely to let crop fundamentals get in the way.  Global inventories are high, and look set to remain that way.

Grain traders used to scouring shipping logs and weather reports for intelligence may find it an unnatural jump to the prose of Ben Bernanke, the chairman of the Federal Reserve.

But it may be a profitable one, given the huge attention that inflation prospects will receive as the central bank boss leads the US economy on its difficult return from period of super-stimulus.

Inflation expectations, as measured by the US bond market (Bloomberg)

 

 

 

 

 

 

 

 

 

 

 

Prices for Chicago's neat-term wheat contract (Reuters)