Wheat Prices Poised to Rebound Again on Seasonal and Exogenous Factors

Wheat prices sharply declined in recent weeks being impacted by ongoing news and overall market’s volatile macro environment due to the Fed actions, but not fundamentals, which remain highly supportive for future massive recovery. Uncertainties related to grain supplies from Ukraine highlight the potential for further supply chain disruptions that can send wheat prices higher.

It's recognized that global wheat supply conditions are tight through a trend of declining inventories over the last several years and otherwise soft output growth. According to data from the United States Department of Agriculture (USDA), ending stocks from major exporters are forecast to end the 2022/2023 season at the lowest level since 2016/2017.

One of the biggest uncertainties has been the output and trade between Russia and Ukraine. For context, Ukraine represented approximately 11% of total global wheat exports last year when it moved 18.8 million metric tonnes, whereas, combined, Russian plus Ukrainian wheat exports account for up to 30% of total world’s.

On this point, a recent development was a successful resolution of the export deal between Russia and Ukraine mediated by Turkey to ease the global food crisis. The treaty provides for safe passage of cargo vessels at Ukrainian Black Sea ports that had been subject to a blockade from Russian naval forces and Ukraine’s underwater mines’ clearance operation. Naturally, the move to ease tensions was seen as positive for improving trade conditions and explains some of the correction lower in the price of wheat and other commodities more recently. However, what happened was just a return to already priced-in world wheat supply dynamics.

The projected total world’s 2022/23 wheat supply is around 1,052 million metric tons at best based on this year’s June outlook, compared with 1,074 million metric tons as of 2020-21 crop season. However, during the 2020-21 crop season, the price of wheat was at $6–$7 per bushel, and cumulative inflation for the period added up around 18–20%, while now wheat is trading at around $9.15 per bushel. At a glance, the current wheat price may appear justified at the current levels, however, we all know that geopolitical factors won’t easily subside in the coming months, while countries are facing the approach of the fall and winter months in the Northern Hemisphere, and another Covid wave will most likely worsen the current broad global supply bottlenecks caused by exogenous factors.

There is another major factor at play supporting a bullish outlook for higher wheat prices. One of the major headwinds against commodity prices in recent months has been the uncharacteristic strength of the U.S. Dollar. A scenario where the Dollar finally faces a reversal trend would generally be positive for commodities. In this respect, the weaker than expected Q2 GDP data from the U.S. and gradually calming bond yields growth are supportive for the Dollar to get lower in the coming months as the Fed may ease up on its aggressive policy stance.