ETF Trends
ETF Trends

According to farmers, doomsday predictions by climate scientists don’t matter.  Doomsday already happened on June 26, 2011 – at least in Vega, Texas where temperatures reached 114 degrees Fahrenheit and winds were 40-50 mph.

We speak about weather conditions as a driver of commodity prices on a regular basis. We discuss droughts, freezes, hurricanes and even ideal conditions. Although in many places ideal conditions are being reported, industry trade group, Kansas Wheat, said that “fields across Kansas”, the top US wheat producing state, “continue to dry up as farmers state-wide are scrambling to finish harvesting their wheat.”

Why might this be the case? There is a water source that comes from underground rather than the sky. It is not generally part of the weather report but it is vital to the American Breadbasket that feeds billions throughout the world. This water source is called the Ogallala Aquifer and is a shallow water table aquifer located beneath the Great Plains in the United States. It is drying up and impacts the prices of wheat. YTD, the S&P GSCI (Chicago) Wheat is -7.2% YTD, while the S&P GSCI Kansas Wheat is +7.2% YTD (through July 3, 2014.) 

Notice in the chart below, how the water under Kansas is drying up:

Since Doomsday on June 26, 2011, the DJCI All Wheat TR, which is made up of both Chicago and Kansas Wheat, has lost 31.5%, though there have been summertime spikes throughout. Notice in the chart below, between June 30-Aug 31, 2011, there was a gain of 22.5%; from June 1-July 20, 2012, there was a gain of 48.7%; and in 2013, from Sept 5-Oct 23, a gain of 10.0%. On July 1, 2014, the index hit a new low from the record set on Jan 29, earlier in the year. Despite “ideal weather conditions” in some parts, this may be the low before the next summertime spike – which may be higher than ever as the underground water dries up.

Source: S&P Dow Jones Indices. Data from June 2011 to July 2014. Past performance is not an indication of future results.

This article was written by Jodie Gunzberg, global head of commodities, S&P Dow Jones Indices.

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