Wheat markets are behaving a little differently these days, with the forecasted El Nino and continuing disruptions in supply due to the conflict in Ukraine, but there has been little movement in price. It’s a far cry from the beginnings of the conflict and there seems to be plenty of upside risk.
It’s been some time since we looked at Russian and Ukrainian wheat exports, and the data is worth updating. Figure 1 shows the world’s major wheat exporters over the last 12 years. Russia and Ukraine are forecast to have a small reduction in exports this year, but they are still expected to ship over 50 million tonnes of wheat.
The United States Department of Agriculture (USDA) expect Russia and Ukraine to account for 28% of world wheat exports this year, with much of it having to be shipped through the Black Sea. As outlined in Nick Booth’s Friday comment, there are some serious doubts about how much wheat will be shipped this year, with delays in exports expected (article available here).
The fact that the market has hardly moved on the Black Sea supply disruptions suggests that consumers and speculators are highly confident that shipments will return to something near normal.
You can’t open social media these days without seeing an article about the dire impacts expected from the ‘Super’ El Nino. Thus far, impacts in Australia have been relatively benign, as we are a major winter-cropping country which has received regular rainfall.
Concern may turn to South America, as the northern half of Brazil will generally experience drier weather in an El Nino. Brazil is a big producer and exporter of corn and soybeans, and any decline in production will impact prices.
Those concerned about higher grain prices do have tools available to help manage some potential risk. Figure 1 shows CME Soft Red Wheat Futures (SRW) have rallied a little and are way off the extremes seen in 2022, when it could be argued supply risks were similar.
The downside in wheat appears to be relatively limited and if supply issues persist or get worse, $400/t could be just the first target.
What does it mean?
Potentially, the use of futures, swaps or call options will offer peace of mind to those exposed to grain prices, without the cash outlay required to buy physical grain. The markets seem to be saying ‘she’ll be right’ but the risks to supply are obvious, and we know what it will do to prices.
Key Points
- Current and potential supply issues are failing to move wheat markets higher.
- There is potential for a significant upside, with further geopolitical and weather impacts.
- Using swaps, futures or options to manage prices can potentially offer peace of mind.
Click on figure to expand
Click on figure to expand
Data sources: Meat & Livestock Australia, DPIRD WA, Mecardo
