Trade in the grain market has been difficult, especially during harvesting and planting periods. This has historically placed us at the agricultural center for global grain trade. Evidently, the tension in Ukraine and subsequent 15% rise in wheat prices has reminded everyone that even agricultural markets are now global. It’s not enough to just keep an eye on the domestic weather to predict spring wheat seeding success or determine the success of winter crops. It is now imperative that we focus on global production issues as well as World Trade Organization (WTO), agreements.
Every country was concerned about their sovereign food security after the 2008 drought’s commodity price spike. The WTO quickly facilitated negotiations regarding the base storage levels of different crops, as well as export prices. Subsidies were also offered by the WTO to encourage staple grain production in untapped countries. This has resulted in a historic fall in wheat prices relative to corn on global markets.
India is the home of the two main causes of the current pricing structure. India has been working hard to create an agribusiness revolution. They have seen tremendous growth in all major agricultural areas, including wheat production. India’s wheat production has increased by 50% in the past ten years. They are expected to harvest more than 100 million metric tonnes this year. This harvest would surpass the combined harvests of Australia, Ukraine, and Russia.
Global markets have accounted for India’s supply. The subsidies that the Indian government provided to Indian wheat exporters at nearly $80 per tonne have not been included in this accounting. Wheat is the most perishable main staple crop (corn beans, wheat, and beans). It must be delivered to the market within a reasonable time after harvest. Indian wheat has not been able to reach the markets at competitive prices due to India’s insufficient infrastructure. This has historically led to gluts on the Indian market. Due to current market prices and governmental subsidies, Indian wheat producers were able to compete with the usual global suppliers to Asia and the mid-East.
These effects have resulted in a price differential of corn and wheat that is extremely low. At least, according to my charts from 1980. Based on my experience with the markets, I’m used to seeing wheat prices at twice the corn price and beans prices at about twice the price of wheat. These are only guidelines, but they are based on historical precedent. Wheat currently costs about 1.3x the price of corn, or a 30% premium, if you will, while beans and wheat are about the same.
The spread of wheat and corn has started to return to its historical normal relationship and we expect that it will continue to do this as the Indian harvest ends next month.
Wheat prices rose by an unprecedented 6.34 percent Monday, continuing the record-breaking 38 percent July surge. Speculators were drawn to the gloomy news by even more people, even though the fundamentals remain stable.
July, for example, was the hottest month since records began over 130 years ago in Russia, which is the third-largest exporter of wheat. Moreover, more than 30 people died from forest fires. Large swathes of the wheat harvest are also being destroyed. Russia’s expected exportable wheat harvest has fallen nearly half, and it could fall even further if there is more drought.
Some other regions were also affected by severe weather conditions.
The US prices closed Monday at $6.9975 per bushel. Prices have fluctuated between $4.2625 and $7.0725 over the past 52 week.
For November delivery, the price of wheat futures on European market rose to over 200 euros per ton. This is the highest level since late spring/early summer 2008.
Europe is the second largest source of wheat for the global market. However, many European countries, such as Germany and Poland, were experiencing extremely dry and hot weather. This resulted in a lower expected harvest. According to the International Grains Council, Canada’s output will drop by 17 percent because of strong rains during seeding.
According to the IGC’s most recent Grain Market Report, which was released July 29, the lower wheat production is not bringing world production into line with projected consumption.
The huge global wheat reserves, which amount to around 200 million tonnes, will be kept virtually unchanged. Analysts believe that even a permanent destruction by fires and severe drought in Russia would not affect the fundamentals. They see ample potential for flexible adjustments, if there’s more wheat production.
The recent price explosion was therefore fueled by speculation based only on bad news and a modest downwards adjustment in this year’s harvest volume.
The most significant one-month increase in wheat futures prices in history is the recent one. From the June week to the August second peak, wheat futures prices increased by more than 50%. The market is in a downtrend and there are plenty of global supplies, so wheat prices could rise even more. Investors scrambled to take advantage of the long-side of the wheat futures markets when it became apparent that Russia, Canada and France Hungary may lose tens of million of tons of supplies due to unusually hot weather in Europe, Asia, and Canada.
Importers might look to lock prices in now in case the market moves higher. Because of Russia’s low shipping costs, Egypt imports most of its wheat from Russia. The need for the largest wheat importer in the world to diversify its suppliers could push the demand towards the United States, Australia or the European Union.
The USDA recently released a report on July exports that showed Egypt was a buyer of U.S. Wheat. Brazil is the second largest buyer of U.S. wheat, and it typically purchases its wheat from Argentina. Brazil had to look for other sources of wheat after Argentina went through severe drought.
Food inflation was high in 2007 and 2008. Wheat futures prices rose to $13 per bushel, while corn futures prices rose to $7.50 per bushel. In case of a 2008 and 2007 type of food inflation, it may be necessary to increase strategic reserves of wheat and corn.