Wheat prices have fluctuated over the past four years. After years of stability, a perfect storm of factors sent them soaring. A global supply deficit, pandemic disruptions and the war in Ukraine contributed to this surge. But now prices have fallen back to levels not seen since 2020. Will this downward trend continue, or could future production issues caused by weather and climate change cause another price spike?
From consolidation to a new all-time high
In 2016-2020, wheat prices remained relatively stable due to global overproduction. But that changed as the outlook for production worsened – partly as a result of rising global temperatures – while demand, particularly from China and India, continued to rise. The pandemic initially caused a decline, but problems in the supply chain soon sparked a new uptrend.
The outbreak of war in Ukraine further intensified the situation. As the main exporters of wheat, Russia and Ukraine contributed significantly to global exports. Concerns about disruptions to Ukrainian exports and sanctions imposed on Russia initially drove prices to almost double. However, the expected price boom lasted only a short time.
Record production and stocks from Russia
Access to the Russian market remained largely unbroken. Ukraine also managed to resume some exports through land routes and a partially restored sea route. In addition, Russia enjoyed a record harvest that further filled its already overcrowded warehouses. This huge available supply, which was particularly attractive to Asian buyers thanks to its low price, became a major drag on world wheat prices.
The price of Russian wheat at Black Sea ports is currently below $190 per ton, significantly cheaper than US wheat at $207 and West European wheat at $225. This price pressure is likely to continue until Russia exhausts its current surplus and the next harvest – which is also expected to be strong – arrives.
US exports are falling, but acreage is falling
Although the United States is not the largest producer or exporter of wheat, its market data still has considerable influence. With exports at their lowest level since the 1970s, the price of US wheat faces strong downward pressure. This drop is due to a combination of factors, including increased demand for cheaper Russian wheat and a strong US dollar, which makes US wheat less competitive.
However, there are potential signs of future trouble for the US market. The USDA’s March forecasted acreage report projects a 5% decrease in acreage compared to the previous season. Despite this, production and ending stocks are expected to increase further for the 2024/2025 season, as the projected harvested area will be higher. The expected buyout price for the upcoming season is slightly higher than the current market price, but remains lower than the buyout prices at the end of the previous season.
Hope on the horizon, or more turbulence?
Despite the current excess of supply over demand and falling exports from the US, the situation in the world remains tense. The ongoing war in Ukraine and the possibility that Russia will limit Ukrainian exports are causing concern. In addition, neighboring countries are hesitant to rely on land routes for Ukrainian exports, which could disrupt other supplies.
The volatile situation in the Middle East and possible blockades of the Red Sea could further disrupt supplies to key importers in Africa and Asia. Another wild card is the weather. Rising global temperatures have led to long-term droughts in major producers such as Australia and Canada in recent years, and the US could face a similar fate. Summer forecasts call for higher than average temperatures and lower humidity, which could lead to a smaller harvest than the projected acreage. In addition, low prices could further discourage planting and harvested areas could be even lower than last year.
Will history repeat itself?
The current price action after the 2022 peak resembles what happened after similar peaks in 1980, 1996, and 2008. Historically, the bear cycle after such peaks tends to end approximately 600 sessions after the peak. If this pattern holds, a price rebound could occur around the time of the US wheat harvest in August and September of this year.
While massive Russian supplies may continue to put downward pressure in the short term, weather factors could very well lead to a price bottom by the end of the summer.
