The price of wheat has risen considerably since the start of the war in Ukraine. It already tended to increase before that, due to the limited supply in the main exporting countries. Where do we expect wheat prices to move and what factors are influencing it?
A bit of context
Wheat is the second most produced cereal (behind maize) and its global trade exceeds all other crops combined, according to World Population Review. It is grown worldwide with concentrations in central North America, Russia, northern India and eastern China.
Wheat, like other commodities, is traded based on expected supply and demand on exchanges such as the Chicago Board of Trade. Soft Red Winter Wheat (Chicago Wheat) is the most actively traded wheat contract on the CBOT. The May 2022 contract is currently trading at US$11.28/bushel and is trading 5,000 bushels (136 tonnes) per contract.
The attached graph shows the producer price index for wheat since January 1, 2000. In recent action, note that prices were already on an upward trend before the invasion of Ukraine due to the tight supplies in major exporting countries. (The dramatic spike in 2008 coincided with the rise in global equity, oil and other commodity markets before the housing market collapse in 2008-09.)
What happened recently?
The war in Ukraine, low supplies, shipping bottlenecks and concerns about drought are factors that affect the price of this product.
Initial stocks and expected availability are low this year. Major exporter inventories are collectively projected to be the lowest since 2012-13. According to the US website Farm Policy News, Ukraine planted 6.4 million acres of winter wheat last fall, but is expected to harvest only four million acres. This spring, plantings are expected to be reduced by 30%, although this is an upward revision from an estimated 40% reduction four weeks ago.
In response to Western sanctions for its invasion of Ukraine, Russia has imposed export bans that include agricultural products until the end of 2022. China and India, two major wheat producers, are finally net importers. To ensure supplies, China earlier this year lifted import restrictions on Russian wheat imposed due to concerns about the presence of a fungus. Conversely, India stepped in to export wheat to Egypt and the Philippines, which traditionally received wheat from Russia.
Grain transport was also hampered. The conflict disrupted the flow of grain from the region and caused great uncertainty in the world grain trade. Ukraine has suspended port operations for commercial activities since February 24 and the movement of Russian grain across the Black Sea is affected by exceptionally high insurance premiums for ships.
The weather also has a longer-term impact. High heat stress is a major environmental factor that limits wheat yield. Every 1 degree Celsius increase above an average temperature of 23 degrees decreases wheat yield by about 10%, according to a report by Sruthi Narayanan, assistant professor of crop physiology at Clemson University. More than 40% of the total wheat area worldwide is affected by high temperature stress.
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Why are commodity prices soaring?
The upshot of all of this is that prices for soft red winter (and hard red winter, another common class) are seeing increases of more than 80% over last year, especially since these classes are in direct competition with Russian and Ukrainian wheat.
Historically, higher commodity prices lead to higher production, which eventually drives prices down – often steeply. But reversing any of the factors discussed for wheat – war, low supplies or drought – may not be enough to reverse the price significantly in the short term. The macroeconomic, climatic and geopolitical environments are calling for high prices for us for some time to come.
Brian Donovan, EEE, is the President of StockCalca Canadian fintech based in Miramichi, NB
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