When it comes to global wheat prices, it has been a heck of a few years. According to data from the International Monetary Fund and the U.S. Federal Reserve, wheat prices roughly tripled from their lows in September 2019 through their 2022 highs. And while wheat and other grains have seen a bit of normalization in price lately, they remain elevated — and perhaps more disturbing for farmers and consumers, the factors driving volatility in this key commodity market remain.
So what’s going on with wheat prices and the broader grain markets? As with every other asset class, there’s no single factor that can account for the price movements. However, generally speaking, we are seeing the one-two punch of weather and war as the biggest underlying trends.
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Weather and Wheat Prices
Starting with weather, there is the short-term trend of an El Nino global weather pattern in 2023. For those unfamiliar with this meteorological phenomenon, a band of warm water develops in the central Pacific Ocean that results in high air pressure in the western Pacific region and low air pressure in the eastern Pacific. Unfortunately for farmers and consumers of wheat, El Nino means hotter and dryer weather in key regions. That includes Australia, which is among the three largest wheat producers on the planet.
Sometimes the short-term impact of tougher conditions in these regions can be offset by more favorable growing conditions elsewhere in the world. But it’s important to also acknowledge that this fluctuation is taking place amid the broader backdrop of climate change and severe weather that makes farming harder everywhere. In fact, a June report in the academic journal Climate and Atmospheric Science explored the potential of “doomsday” extreme weather disrupting winter wheat crops in both the U.S. Midwest and northeastern China in the same year, resulting in a global supply shock even worse than ones we’ve seen recently.
Given all the recent weather-related pressures on supply, as well as the increased uncertainty about future production, it’s no surprise then that wheat prices have moved significantly higher than where they were a few years ago.
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War and Wheat Prices
The idea of uncertainty also applies to recent unrest in Ukraine, which was the fifth largest exporter of wheat — 10% of the world wheat market — before Russia’s invasion of the nation at the end of February 2022. The fact that Russia itself is a major exporter of wheat also adds a complication to the mix, because while its own farm territories haven’t been ravaged by war there is still the weight of global economic sanctions against the Kremlin in the mix.
The resulting supply shock and uncertainty about future production has significantly altered global wheat markets. Global wheat prices soared by about 20% across March 2022 in the immediate aftermath of Russian aggression, hitting the highest levels since 2008 and then marching higher in the months ahead to new records.
In the wake of the conflict, the so-called Black Sea grain initiative was brokered by the United Nations as a way to ensure that much-needed wheat remained available to the rest of the world. The agreement was forged between Russia and Ukraine but also included Turkey, which controls maritime shipping routes out of the Black Sea through the Bosporus. But that agreement was terminated by Russia on July 17, which has already begun to reduce Ukraine’s exports. Add Russian attacks on Ukrainian grain ports and storage facilities in Odessa and Chornomorsk in the days following the collapse of the deal, and the outlook appears even worse for the global food supply. Chicago SRW Wheat Futures (ZWWOO) have climbed more than 9% since the deal’s collapse, as of July 28. Over the past 24 months, wheat has climbed more than 31%.
With ongoing conflict in the region as well as uncertainty around previous efforts like the Black Sea grain initiative, the stresses created by aforementioned weather challenges have been amplified.
Looking Beyond Wheat to Other Grains
While wheat is one of the most in-demand grains on the planet, it’s important to recognize that the dynamics of weather and war also impact other popular grains.
Corn is one good example. Consider that over the years prior to the Russian invasion, Ukraine’s exports made up 15% of world corn trade. And across the entirety of U.S. farms, corn is actually the No. 1 crop nationwide. But just as the pressures of drought and record heat are weighing on wheat production, so are they taking a toll on corn. In fact, the surge in corn prices from their lows a few years ago to recent highs is even more severe than the rise in wheat prices. In the past 24 months, corn futures have climbed 65%, as of July 28.
Another example is soy, which is another leading crop in the U.S. as well as globally. While this grain has seen its prices cool off a bit from recent highs, it too has seen a precipitous rise in prices when compared with 2020 lows, approximately a 54% increase over the past 24 months.
Other lesser-known grains also have seen volatility and record highs, including barley and sorghum.
The bottom line, then, is that these big-picture pressures of war and weather are impacting far more than just wheat prices. And the unfortunate reality is that, with no end in sight to either concern, volatility is likely to continue in the months and years ahead.
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Wheat Prices: How Weather and War Affect Commodities originally appeared on usnews.com
