Bad Weather And War Could Send Wheat Prices Skyrocketing

(Original Caption) 7/27/1955- Kharkov State Selection Station, U.S.S.R.: Members of the Americans … [+] agricultural delegation to the Soviet Union examine the wheat harvest at the Kharkov State Selection Station during their visit to Russia. Giving an outdoor lecture is Professor V.Y. Yuryev, member of the Ukrainian Academy of Sciences (white hat, coat) Photo from an Official Soviet Source.

Bettmann Archive

It’s gonna get rough for wheat farmers and buyers this year. Suboptimal weather across key growing areas and potential disruptions emanating from the war in the Middle east are to blame.

The weather problem has already begun. A dire combination of dry weather simultaneously occurring in four of the largest markets — Russia, Ukraine, the European Union, and the U.S. — will combine with lower than expected harvests in Argentina and Australia, according to a recent edition of the Hackett Money Flow Commodity Report newsletter.

The newsletter sums up the situation as follows:

“All of this suggests that global wheat production for the year ahead is going to be off considerably at a time that ending stocks in exporter hands relative to demand remain wistfully low.”

Wheat prices have retreated massively this year so far this year. A bushel of wheat recently fetched $5.76 down from approximately $9 a year ago, according to data collated by the Trading Economics website.

The unusually high price of $9 was solely connected with the fears surrounding the Russian invasion of Ukraine. The investor worries did not materialize to the level anticipated leading prices to drop.

If Middle East Crisis Escalates Then Expect Market Disruptions

But don’t expect the relatively normal prices to last long even if the weather turns out to be better than expected.

The crisis in the Middle East seems to have the potential to upset any sense normalcy in the wheat market.

The Hackett Report explains this element in the following way:

“A Middle-East geopolitical escalation with Israel and Hamas etc. the geopolitical risks surrounding food and energy are not going away anytime soon. Securing key supplies of food like wheat to a world in escalating turmoil and war is a must and will lead to significant stockpiling demand and a restriction of exports by those who have supplies as a risk buffer.” (My emphasis added.)

That need to boost standby inventories of wheat, which is used to make pasta and bread among other things, will likely be high in the middle income countries in the middle east. Middle income is defined as a country having average per capita earnings of between $1,000 and $13,000 year.

Leaders in many of the countries know only too well that lack of affordable food in Tunisia in 2011 sparked an uprising across multiple countries. The uprising became known as the Arab Spring. Leaders will no doubt be concerned about the potential for a repeat performance and will want avoid it if at all possible. Therefore they will likely start buying grain in anticipation of a widening conflict in the region.

Already, the conflict has spread beyond just Israel and the Iranian-backed Hamas.

Put simply, if this level of violence is just the beginning then there could be a lot more disruption in the region. That could result in increasing numbers of displaced refugees, all of who will need to be fed, plus merchant ships carry grain may be targeted by one side or another.

While so far, that hasn’t happened it is not out of the question and widespread disruptions in the region could likely lead to higher prices.