Tom McClellan (Jul 27, 2012) - Sunspots are a big driver for wheat prices. Various pundits are putting out stories blaming the drought in the
plains states on global warming [...] A better explanation for the drought, and the ensuing spike in grain
prices, is that this is all part of the normal 11-year sunspot cycle. But to find that relationship in the data is what the story is about. The first point to understand is that sunspot activity has now been
scientifically linked to changes in cloud formation. When the sun is
more active, the charge particles streaming out from sunspot activity
help to sweep away cosmic rays that might otherwise hit earth's
atmosphere, where they play a role in cloud formation. [see also HERE]
Once you get past that more difficult scientific hurdle of
understanding that cosmic rays and clouds are related, it is pretty easy
to understand that less cloud formation is related to less
precipitation, and thus poorer growing conditions for rain-irrigated
crops. That is what we are seeing with this year's drought, and it has
been pushing up grain prices accordingly. Looking across the last hundred years of price data on wheat, it can be
difficult to see the relationship between the sunspot number and wheat
prices. Part of this comes from the fact that there are other factors
which sometimes act upon crop yields and thus grain pricing. But a big
factor is that the units we use to measure wheat prices, i.e. US
dollars, can vary themselves, causing the relationship with sunspots to
sometimes be disguised by what the dollar itself is doing.
If we look at the history of these two sets of data before the modern
era of floating currency exchange rates, we can better see how they were
correlated. This chart shows raw wheat prices, un-adjusted for the value of the
dollar. The sunspot number data is shifted forward by 2 years to reveal
that bottoms and tops in the sunspot number tend to be followed a
couple of years later by bottoms and tops in wheat prices. This relationship got into some trouble in the middle part of the
chart, when President Roosevelt's New Deal price fixing artificially
inflated wheat prices. The intention in the 1930s was to benefit
farmers by keeping wheat prices up.
That effort switched during WWII to
the government putting a cap on all prices, including wheat, to support
the war effort. Rationing of food, fuel, and other items took over for
market forces. Additional trouble came in the 1970s, when the Arab Oil Embargo pushed
up oil prices in 1973-74, reducing acreage under cultivation. Then
later in that decade, the rising value in the dollar pushed down the
dollar price of most commodities compared to prices in other
currencies. So using dollars to see the normal cyclical relationship in
price data became problematic.
All of this explanation brings us (finally!) back to the lead chart above. In [the above] chart, I have adjusted the dollar price of wheat, multiplying it by the US Dollar Index, which was created back in 1971. This mathematical step produces a unit-less measure of the value of wheat by factoring out the dollar's movements. Doing this allows us to better see how the peaks and troughs in wheat prices have been related to the sunspot cycle.
I want to emphasize again that the sunspot number is shifted forward in that chart by 2 years, to reveal its leading indication for how wheat prices will behave. The conclusion from this is that the upward move in the value of wheat right now is just following the swoop upward in the sunspot number that began in 2009. We should expect to see generally rising prices for wheat and other grains until about 2 years after the sunspot cycle has peaked, a peak which has not even happened yet.