Drought in Kazakhstan, steak prices rise in Vancouver

In our principles classes we try and show the interdependencies of different markets in different countries. We know it happens, but journalists aren’t normally cooperative in giving us articles we need to demonstrate this ... until this week.

An October 11 article from the Globe and Mail (click here for article) and an October 12 article from the NY Times (click here for article) provide just the kind of obscure relationship that we’ve been looking for.

The story starts with a catastrophic drought in Russia, Ukraine and Kazakhstan, countries that normally grow a large amount of wheat. As the supply of wheat falls, the price of wheat will rise. Since corn is a substitute for wheat, the demand for corn then begins to rise. Shift the focus 6,500 miles west to the American Corn Belt where there was too much heat and too much rain. The weather in the USA reduced the supply of corn. Go another 6,500 miles west and we find that China has been importing American corn. The increase in demand from China and the increase in demand due to the increase in wheat prices together with the decrease in supply from the weather have caused corn prices to rise.

Now turn around and head 7,000 miles west to Texas where they raise cattle. Corn is used as feed stock and, since corn prices are rising, the cost of raising cattle rises. The supply of beef decreases and beef prices rise, including the price of steak in Vancouver.

Next, we`ll head 1,300 miles north to Saskatoon, where they produce potash. Potash is used in the production of fertilizer. When the price of corn increases, the quantity supplied increases. Farmers try and grow more corn. They do this by planting in areas less suitable and use more fertilizer. The demand for fertilizer is a derived demand – derived from the demand for corn. The demand for fertilizer rises and the demand for potash rises. Therefore the price of potash rises.

As potash prices rise, the profits of potash producing companies, such as the Potash Corporation will rise. If profits are expected to continue to rise, and/or the firm is not maximizing profits, they may become a takeover target. Another firm may attempt to purchase most or all of the outstanding shares of the company.

That brings us to the last stop on our trip, 9,000 miles southwest from Regina to Melbourne Australia, the home of BHP Billiton. BHP has recognized the upside potential for potash and has made an unsolicited $38.6 billion hostile bid for Potash Corp.

Our story is complete. From the wheat fields of Kazakhstan, 30,000 miles to the corporate offices of BHP Billiton we have seen the interdependence of markets.