After a feverish series of months where the price of wheat hit a decade high after Russia’s invasion of Ukraine, the grain recently saw a sharp drop in futures prices.
Reuters reported on Monday that U.S. wheat futures fell to their lowest point since February. And front-month wheat futures on the Chicago Board of Trade in the U.S. and on the Matif futures exchange in the European Union are both down 20% since mid-May, according to Paul Hughes, chief agricultural economist with S&P Global Commodity Insights. He cited a few factors for the decline.
For one, weather in the Northern Hemisphere has become more favorable after hot, dry conditions hampered the planting of spring wheat in North America and conditions threatened progress on farms in the European Union. “The weather has normalized and the production outlook is improved,” he said via email. “Additionally, there is the normal seasonal price pressure that comes from the Northern Hemisphere harvest of winter wheat that is underway.”
Meanwhile, Australia, which is one of the biggest exporters of wheat, is expected to produce a bumper crop, Bloomberg reported.
Demand has also taken a hit. About 20% of wheat produced is fed to animals globally “in a normal year,” Hughes said. “However, wide price premiums of wheat versus corn have minimized wheat feeding globally, reducing demand.”
Finally, the U.S. Federal Reserve’s decision to raise interest rates has lessened investors’ expectations of inflation and caused money to flow out of commodities, he noted. “In mid-April, investment funds held long positions in [agricultural] commodities in excess of $55 billion,” he said. “That long position has been cut by $20 billion and now sits near $35 billion by our calculation. This liquidation has in itself hastened the decline.”
But is this trend expected to continue, especially as fears of a recession grow? Not necessarily, according to Kenneth Scott Zuckerberg, lead economist, grain and farm supply, with CoBank.
“Notwithstanding the recent decline, we think we're probably at bottom, and in fact, we would argue that we probably put in a floor here,” he said.
Zuckerberg cited a series of “demand signals” in just the past few days. For one, Egypt — one of the largest importers of wheat — is seeking to bolster supplies that have been pressured by the Ukraine invasion, joining countries including Taiwan, Algeria, Jordan, Pakistan and Bangladesh, and several export markets are responding. Meanwhile, global shortages of wheat will probably linger for another two crop seasons, he said.
“When prices go up, and a recession is looming, I think consumers are going to vote with their pocketbook.”
Kenneth Scott Zuckerberg
Lead economist, grain and farm supply, CoBank
Notwithstanding speculators’ current bearish sentiment, there is plenty of reason to expect wheat prices to rise longer term in the face of growing demand. Zuckerberg noted the continuing effects of the Russian invasion in terms of export restrictions on Ukrainian wheat and a high probability the country’s winter wheat crop will be much lower this year, resulting in tighter global supplies.
On the demand side, many Middle East and North African countries are facing a deficit of wheat. “So we think they're buying and they're going to buy en masse, and there's only a limited quantity to go around,” he said.
Zuckerberg is watching five factors in determining the direction of wheat prices for the remainder of the year. The movement of grain out of Russia and Ukraine is one. Secondly, the analyst will be examining the crop progress in the United States. On Monday, the USDA released numbers showing that the condition of spring wheat is better this year than at the same point in 2021, while winter wheat is in poorer shape.
The third factor has proved especially influential in shaping the outlook for crops like wheat, corn and soybeans this year: weather. A La Niña weather pattern, which can cause severe conditions, “is likely to pressure crop yields, and we just had some news that Argentina's wheat crop is in less good shape than people had thought,” Zuckerberg said. “That will weigh on yields, which means less supply, higher prices.”
The agricultural analyst will also watch how acreage is switching between different crops in the United States. According to the USDA’s crop progress report released today, wheat and soybean planted acreage is up just 1% from 2021, while corn acreage is down 4%. The USDA noted the acreage for wheat marked the fifth lowest planted area for all wheat since records began in 1919. Zuckerberg said the trade consensus was that acreage for wheat would decrease because of challenging weather conditions.
Finally, what’s the macro global economic environment? Could China, emboldened by Russia’s advances, make moves to assert control over Taiwan? How will the U.S. economy fare compared to other countries in terms or slumping into a recession?
“Another part is, God willing we don't have another Arab spring, but it's summertime, it's hot. And some people feel they're running out of food,” Zuckerberg said. “So I'm sort of on edge with whether or not there might be an increase in conflicts in that part of the world.”
That said, there’s also a “corrective force” for prices at play, he said: consumers. With food prices up nearly 12% this year compared to the year prior, according to the Bureau of Labor Statistics, how will shoppers respond to their higher grocery bills? A recent analysis of transaction data by Symphony RetailAI found that the most price-sensitive consumers — approximately one-third of all shoppers — are turning their back on the products they have been loyal to and have traditionally purchased and switching to more affordable alternatives. Could they also change the types of foods they buy?
“When prices go up, and a recession is looming, I think consumers are going to vote with their pocketbook,” Zuckerberg said.