Insight Focus
Global wheat stocks have declined every year for nearly a decade. With wars, conflicts, and trade tariffs disrupting industries worldwide, geopolitics and global stability remain highly precarious. Nonetheless, wheat prices have calmly weathered these storms and are now at or nearing levels below production costs. This fascinating evolution highlights the extraordinary resilience of the wheat trade.
Wheat Prices Fall Over Last Three Years
The two charts below, representing both sides of the Atlantic, show a material decline in prices over much of the last three years, following the spike in values after Russia’s invasion of Ukraine.
Prices currently sit at levels equal to or below the cost of production throughout much of the wheat-growing world.
Global Wheat Stocks Shrink to Lowest Level Since 2016
Global wheat stocks have been falling year-on-year for nearly a decade and currently stand at their lowest level since 2016/17.
Source: USDA
As production continues to lag behind consumption, mainly due to an ever-increasing world population, the year-on-year decline in ending stocks has not yet halted the drop in wheat values.
Conflicts and Tensions Drive Uncertainty
Russia’s invasion of Ukraine in February 2022 caused an unprecedented spike in world wheat prices as concerns focused on the disruption of supply from the largest and fourth-largest sellers to the global market. These concerns have largely subsided as, despite the bombings, vessels continue to ship grain from Black Sea ports to feed major importers.
We are currently witnessing a mountain of disturbing news for the world in both humanitarian and economic terms:
- Russia’s war continues to rage in Ukraine.
- Tensions remain high in the Middle East, with Israel involved in ongoing conflicts in the region, including Iran.
- US President Trump is waging an economic war on virtually the entire world as he imposes trade tariffs and threatens to take over other sovereign territories, such as Canada and Greenland.
- China repeatedly voices its intent to take back Taiwan, by military means if necessary.
Assessing the Price Decline
In years gone by, many of these major global events would likely have prompted significant market volatility, with prices swinging up and down with such serious headlines.
The outbreak of Russia’s war in Ukraine drove exactly this type of volatility, with an extraordinary rally in values not seen in living memory. The subsequent calm, as trade kept flowing, appears to have created an apathy even for the most extreme headlines.
Wheat buyers have learned to relax in the face of world crises, buying as they need, rather than reacting to the latest headline.
In turn, sellers have been forced to compete aggressively for any business as and when importers tender. In addition, the relative collapse of the Russian rouble since 2022 has allowed the world’s largest exporter to be a cheap seller over much of the past three years. This has forced other Black Sea exporters to compete, pressuring prices on a wider scale.
In essence, the market has evolved to take the turmoil of current geopolitics in its stride, with a sense of calm and clarity.
The Sustainability of this Market Evolution
The lessons learned from Russia’s invasion of Ukraine have shown the resilience of supply chains to maintain composure, even when faced with extreme events. The consistency of willing cheap sellers has been a luxury for buyers and the main cause of the ongoing price decline.
The long-term sustainability of the current situation will be brought into question as and when the supply side demands higher, more profitable levels. For now, an adequate harvest is being reaped across the Northern Hemisphere, and willing sellers may well persist over the coming weeks, if not months. Ultimately, stocks cannot fall indefinitely. More acres will inevitably be required if populations continue to grow and demand more wheat.
Farmers will be dissuaded from planting greater acres unless prices rise and profitability improves. The next market evolution may be nearer than we think, but only time will tell.
A market always looks cheaper halfway down… but beware… a market is never more bullish than when it appears eternally bearish!
