The price of wheat has spiked significantly since the war in the Ukraine started. It was already trending upward prior to that, owing to tight supplies in key exporting countries. Where do we expect wheat prices to be going forward and what factors are influencing it?
Wheat is the second most-produced cereal grain (behind corn), and its global trade is greater than 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 trades 5,000 bushels (136 tonnes) per contract.
The accompanying chart shows the producer price index of wheat since Jan. 1, 2000. In recent action, note that prices were already trending upward prior to the invasion of Ukraine because of tight supplies in key exporting countries. (The dramatic 2008 peak coincided with elevated markets globally in stocks, oil and other commodities prior to the housing market bust in 2008-09.)
What’s been happening recently?
War in Ukraine, low reserves, shipping bottlenecks, and concerns about drought are factors affecting the price of this commodity.
Both initial stockpiles and projected availability are low this year. Major exporter stocks are collectively projected as the lowest since 2012-13. According to U.S. website Farm Policy News, Ukraine sowed 6.4 million acres of winter wheat last fall but is only expected to harvest four million acres. This spring plantings are expected to be reduced by 30 per cent, albeit an upward revision from an estimated 40 per cent reduction four weeks ago.
As a response to Western sanctions for its invasion of Ukraine, Russia has imposed export bans that includes agricultural products until the end of 2022. China and India, both large producers of wheat, are ultimately net importers. To ensure supply, China earlier this year lifted import restrictions on Russian wheat imposed over concerns about the presence of a fungus. Conversely, India has stepped in to export wheat to Egypt and the Philippines, which had traditionally received wheat from Russia.
Grain movement has also been hampered. The conflict has disrupted the flow of grains from the region and caused great uncertainty in global grain trade. Ukraine has suspended port operations for commercial activities since Feb. 24 and Russian grain movement through the Black Sea is affected by exceptionally high insurance premiums for vessels.
Weather is also having a longer-term impact. High temperature stress is a major environmental factor that limits yield in wheat. Every increase of 1 degree Celsius above a mean temperature of 23 degrees decreases wheat yield by about 10 per cent, according to a report by Sruthi Narayanan, assistant professor of crop physiology at Clemson University. More than 40 per cent of total wheat area in the world is affected by high temperature stress.
The result of all of this is prices for soft red winter (and hard red winter, another common class) are seeing increases of more than 80 per cent from last year, especially given these classes are in direct competition with Russian and Ukrainian wheat.
Historically, higher commodity prices lead to higher production, which eventually brings prices down – often abruptly. But reversing any one of the factors discussed for wheat – war, low reserves or drought – may not be enough to reverse the price significantly in the short term. The macroeconomic, climatic and geopolitical environments tell us we will be seeing high prices for some time.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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