Australia's Millennium Drought and the Wheat Price Explosion

Wheat is boring. It just sits there in a field, grows, gets harvested, becomes bread. Nobody thinks about wheat until the price of bread doubles and suddenly everyone is an agricultural expert. Chapter 27 of Torsten Dennin’s “From Tulips to Bitcoins” tells what happened when Australia, one of the biggest wheat exporters on the planet, stopped producing wheat. Not by choice. Because the rain stopped coming.

The Driest Country Gets Even Drier

Australia was already the driest inhabited continent. Then 2006 arrived and became the third-driest year since records started in 1900. Everyone thought that was bad. Then 2007 came and topped it. Prime Minister John Howard called it the “worst drought in living memory.” He was not exaggerating.

The cause was El Nino. That is the weather pattern where Pacific Ocean temperatures rise and mess up rainfall across half the planet. For Australia, El Nino means less rain. A lot less rain. And when you are already the driest continent, “a lot less rain” means disaster.

Seventy percent of agricultural land was affected. That is 320 million hectares. To put that in perspective, the Murray-Darling Basin alone is the size of France and Spain combined. That one basin produces 40% of Australia’s wheat. And it was drying up.

What Drought Looks Like on the Ground

Dennin includes the story of a farm called Uamby. The farmer started with 4,800 sheep. By the time the drought hit full force, only 2,800 were left. The rest had to be sold. Not at the expected price of $40 per head. At $5 each. Five dollars for a sheep. Barely enough to cover the fuel to drive them to the auction.

This was not one unlucky farm. Over 400,000 people worked in Australia’s agriculture sector, and they were all getting crushed. The statistic that stopped me cold: in early 2007, a farmer was taking his own life every four days. Every four days. That is what a drought does when it goes on long enough. It does not just kill crops. It kills hope.

From Second-Largest Exporter to Almost Nothing

Australia was the second-largest wheat exporter in the world after the United States. In a normal year, the country exports around 25 million tons. That is a significant chunk of global supply. When you remove that much wheat from the world market, prices move.

The 2006-2007 winter harvest came in at an estimated 26 million metric tons total production. That was 36% less than the previous year. For a commodity market that runs on thin margins, a 36% drop from one of the top producers is an earthquake.

Global wheat inventories fell to a 26-year low. There was simply not enough wheat to go around.

The Price Goes Vertical

Wheat normally traded between $2.50 and $4 per bushel. That was the range everybody was used to. Boring, predictable, stable.

In October 2006, wheat broke $5 per bushel for the first time. That got people’s attention.

Then it kept going.

June 2007: $6. August: $7. September: $8. Then $9. Then $9.50.

Every month brought a new record. Traders who had sold wheat short were getting destroyed. The fundamentals were clear. Less wheat was coming out of Australia. China and India were eating more. Global stocks were at multi-decade lows. There was no ceiling in sight.

In February 2008, wheat broke $10. On February 27th, it closed at $12.80 per bushel. That is a tripling from early 2006 levels. Wheat. The most boring commodity on earth. Tripled.

The End of the Drought

Like most commodity spikes driven by weather, this one ended when the weather changed. The 2008-2009 harvest came back strong, with global production hitting 688 million metric tons. Prices came back down. The crisis was over, at least for the traders and the bread buyers.

For the Australian farmers who had survived, things slowly returned to normal. But the damage was done. Years of lost income. Depleted herds. Mental health scars. A drought does not just end when the rain comes back.

What Stays With Me

This chapter has echoes of the orange juice story from Chapter 23 and the zinc story from Chapter 21. A commodity that nobody thinks about suddenly becomes the most important thing in the world because of weather. Same pattern: concentrated supply, a natural disaster, thin inventories, and prices that go vertical.

But the wheat story hits different. Orange juice is a breakfast luxury. Zinc is an industrial input. Wheat is food. When wheat prices triple, people in developing countries cannot afford bread. The consequences are not just financial. They are human.

Dennin mentions that weather experts were already warning about more droughts to come because of climate change. This was 2007. The warnings turned out to be accurate. Australia has faced multiple severe droughts since then. The pattern El Nino creates is getting more extreme as ocean temperatures rise.

The other thing worth noting is how fast the market moved once the supply shock became clear. Wheat went from $5 to nearly $13 in about sixteen months. In a market that had been range-bound between $2.50 and $4 for years. The people who recognized the drought early and understood what it meant for global supply made enormous returns. The people who assumed prices would stay in the old range got run over.

Old Hutch cornered the wheat market in 1888 by buying up all the physical supply in Chicago. In 2007, nobody had to corner anything. El Nino did the cornering. Nature removed the supply, and the market did the rest.

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