Wheat: Upward Pressure On Price Continues

Summary

• Wheat prices continue to go higher due to weather-related factors and artificial supply restrictions.
• I expect this to continue for the foreseeable future.
• However, wheat could see a drop in price over the longer term if artificial restrictions on supply are eased.

Over the past four years, US wheat prices have seen a slow but sustained trend upward.

Source: investing.com

That said, movements in the commodity have been quite volatile in 2020.

Source: investing.com

With much of the world only gradually easing from lockdown measures, demand for commodities more generally has been weak.

Moreover, with the world reportedly having had the warmest month on record in May – this has implications for the global wheat market going forward in terms of output losses. This is expected to restrict supply and prices are expected to rise accordingly.

It was only up until recently that the wheat market was contending with the opposite problem – oversupply in the market which was keeping prices down.

Back in 2016, increasing grain supply from Russia, coupled with a weaker euro and British pound, had made European wheat exports more attractive relative to the United States. Moreover, with wheat demand from China increasing, the country had at the time allowed Russia to sell its barley to the Chinese market – therefore placing downward pressure on price.

However, the supply-demand dynamic has been largely altered as a result of COVID-19. As it stands, Russian exports have decreased significantly due to government export restrictions as of April – with restrictions set to be lifted on July 1. There's precedent for this, as Russia did choose to ban wheat exports as a result of drought destroying crops back in 2010.

Source: investing.com

Moreover, even when restrictions are lifted – Russian producers can only compete on price for so long. Since 2010, the Russian ruble has weakened against the US dollar very significantly.

In this regard, producers will eventually need to raise prices to recoup foreign exchange losses – and this will have the effect of making US and European exports attractive once again.

Additionally, with China potentially gearing up to impose an 80 percent tariff on barley imports from Australia, this also could place upward pressure on wheat prices going forward.

Given that barley has traditionally been seen as a cheaper alternative to wheat, tariffs on barley would reduce demand as the commodity is now effectively much more expensive, and wheat demand could be expected to rise accordingly.

That said, one counterargument to the so-called “supply glut” that we are seeing with wheat is that – with the exception of droughts this year temporarily reducing supply – much of the decrease in supply we have been seeing is due to trade restrictions rather than an actual drop in the supply of wheat.

It's reported by Bloomberg that wheat supply – even with adverse weather conditions – is set to rise by 0.5% which would still mark a record worldwide. What's ultimately keeping wheat prices higher is the fact that COVID-19 has severely disrupted global supply chains, and trade tensions are artificially reducing the supply of wheat.

Under the current macroeconomic environment, I see upward pressure on wheat continuing. However, the commodity could see a significant fall over the longer term if artificial restrictions on wheat supply are lifted over time.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.