Drought in US Wheat Regions Increases Pressure on Food Prices
Published by ChAINov 17 2022
This week, the UK consumer inflation rate rose to its highest level in over 40 years as it reached 11.1% in the 12 months to October. A key reason for the rampant run of inflation this year has been the rising cost of food commodities which ultimately translate into higher prices on supermarket shelves. One agricultural commodity which has undergone more price volatility than most this year has been wheat, and recent reports about the state of the US crop of Winter Wheat suggest that the strength of the wheat market remains uncertain.
Conflict and Climate
There is an extensive list of factors that have driven a record-breaking year for wheat prices. Most notably, Russia’s invasion of Ukraine in late February caused prices for Chicago Wheat futures on the CME to surge from around ¢750 per bushel to peak at over ¢1400 per bushel in early March. Prices continued to trade above the ¢1000/bsh mark for several months before declining during June and July to largely trade within a ¢750-¢9000/bsh range since the summer. While this price level seems much more manageable compared to the initial price explosion in March, it is worth bearing in mind that this is still more than double the price of Wheat five years ago. Some of the pricing pressure that stemmed from the political fallout from Russia's invasion was alleviated by the agreement, and recent continuation, of the protected shipping corridor in the Black Sea which has allowed Ukraine to export its grains. Nonetheless, both the rumoured and actual development of the conflict will continue to impact grains prices going forward.
Elsewhere, weather has played an important role in the development of wheat crops, and therefore prices, around the world. In Argentina, the largest wheat producing nation in South America, dry weather has plagued the country’s fields for several months which has led to continual reductions in yield forecasts. According to Reuters, the Buenos Aires grain exchange cut its most recent estimate from 17.5 to 16.5 million tonnes, and the lack of rain has been a key driver behind this decline. With the uncertainty surrounding the future production and availability of grain-producing heavyweights Russia and Ukraine, diminishing crops in other growing regions of the world could increase upward price pressure.
On the other side of the Pacific, the story has been quite different for Australia. The nation is another major producer of wheat and early season reports suggested that it could be on track for a record crop. Recently, however, the La Niña weather phenomenon has brought extended downpours to eastern Australia and submerged large areas of low-lying crops. While the full extent of the damage to growing regions across New South Wales and Queensland will not be known until the floodwaters have retreated, it is a disappointing development given the earlier trajectory of this year’s crop. In September, the Australian Department of Agriculture estimated that wheat production in 2022/23 would “reach 32.2 million tonnes in 2022–23, 30% above the 10-year average to 2021–22 of 24.7 million tonnes.” While the total yield will now likely fall short of this prediction, many will be still hoping that Australia can provide some welcome relief to the tight global wheat supply.
ChAI’s Satellite Drivers on 3 month horizon for CME Chicago Wheat prices
Satellite Spots the Impact of Drought
In the past few months, the wheat-growing regions of the United States have been affected by similar dry weather patterns to Argentina. In late October, an article by Reuters highlighted the issues that farmers were having planting their winter wheat seeds across several key grain states due to sustained dry weather throughout summer and autumn. These challenges, and the subsequent impact on the potential of this year's winter crop, have been reflected in ChAI’s Satellite data family which is having a notable bullish impact on a 3 month horizon. As can be seen in the image above, the satellite data picked up in North Carolina and Wisconsin is particularly driving upwards price pressure. Based on the NDVI information, a method of using satellite imagery to measure crop coverage, recorded on October 31st there has been approximately a 7% decline in wheat growth in North Carolina and an 11% drop in Wisconsin compared to the same time in 2021. Recent USDA reports have still been projecting an increase of 4 million bushels in total US wheat production in 2022/23 compared to the previous year. However, even if this projected increase materialises despite the recent weather issues, the total production will remain well below the 5-year average of the previous 2 decades. At a time when there is such uncertainty of future global wheat supply, the challenges facing American farmers implies bad news for wheat prices in the medium term and continued high food costs for consumers.