I’m in Costa Rica this week and was amazed by the vast sugar cane fields we passed on the way to the resort. Despite the language barrier, our cab driver managed to convey that the sugar crop was so robust that many farmers harvested their crop earlier than usual.

Although I’ve wearied of the word “crisis”–a term the mainstream media is all too eager to trot out when things go wrong–that’s exactly what wheat producers face.

Russia, Central Europe and Asia are suffering through the worst drought in generations, which, coupled with unusually high temperatures, has sparked massive wildfires in wheat-growing areas. Regional wheat and barley prices have soared, along with prices of everything from beer to bread. And because the region is a major wheat exporter, grain prices have jumped around the globe.

Meanwhile, dry weather in Australia, the world’s fourth largest wheat exporter, have damaged the country’s crop. Canada faces the opposite problem: Wet weather at planting time can cause the seed to rot in the ground and makes the crop more susceptible to blight.

The importance of wheat can’t be overstated. Not only is the grain a major food source for humans, but it’s also a key feed grain in many parts of the world; if wheat prices head higher, the cost of just about everything we eat will rise.

The prospect of a disappointing wheat crop creates opportunity for a pairs trade, using an exchange-traded note and a company that will feel the squeeze. My advice: Go long iPath Dow Jones-UBS Grains Total Return (NYSE: JJG) and short General Mills (NYSE: GIS).

Tracking an index that offers roughly equal exposure to corn, wheat and soybeans, iPath Dow Jones-UBS Grains Total Return languished earlier this year. At the time supplies of wheat and corn were higher, and farmers increased the amount of soybean acreage to take advantage of higher prices. The prices of all three grains were flat to falling, pressuring the exchange-traded note.

What was a liability will become an asset if wheat supply is constrained. A tight supply would push up wheat prices. Corn and soybean prices will rise to a lesser extent; farmers will feed cattle more corn, and food producers will substitute soy meal for wheat flour in some products.

Wheat represents a major cost center for General Mills, a company that produces many popular cereals. Substitutions won’t be a panacea for higher wheat prices, and the company isn’t fully hedged against higher wheat prices. Margins will feel the squeeze.

What’s New

Charles Schwab has taken advantage of the Treasuries mania to launch three US bond funds: Schwab Intermediate-Term US Treasury (NYSE: SCHR), Schwab Short-Term US Treasury (NYSE: SCHO) and Schwab US TIPS (NYSE: SCHP).

The expense ratios on these offerings suggest that Schwab plans to compete on price to win assets from rival funds. For example, Schwab US Tips carries an expense ratio of 0.14 percent–six basis points less than its closest competitor, iShares Barclays TIPS Bond (NYSE: TIP).

This is a shining example of the Price Wars I wrote about in early July; these are plain-vanilla bond ETFs where price trumps investment strategies and sales gimmicks.

I’m usually leery of broker-branded offerings but give Schwab credit for not getting creative here; these new funds are excellent options for adding Treasuries exposure to portfolios.