Social and political stakes rising with surging wheat prices
Head of Commodity Strategy
Summary: The agriculture sector remains bid with the latest extension being led by surging wheat prices after the introduction of a Russian export tax in order to curb a rise in domestic food prices triggered by the Covid-19 crisis. In 2011 surging wheat prices helped trigger social, political and economic upheavals around the world but most noticeable in North Africa. The rally highlights another tragic development caused by the Covid-19 pandemic as it impacts those who can least afford it.
The six-month bull market in crops continue with sugar, corn and not least wheat being the latest markets receiving a strong bid. Overall the Bloomberg Agriculture Index has already risen by 6% this year thereby contributing to the 43% gains seen during the past six months.
Recently the grain market has received most of the attention. First corn which following the latest WASDE report leapt higher after the US government cut its supply forecasts by more than investors had expected to a seven-year low.
Adding to the general strong sentiment has been the latest moves from Russia, the world’s largest wheat exporter, to reduce shipments in order to curb a rise in domestic food prices triggered by the Covid-19 crisis. After announcing a €25/t tax on wheat exports from mid-February to June they went one further by raising it to €50/t from March with the added risk of being extended beyond June.
Wheat prices on both sides of the Atlantic has rallied strongly with CBOT wheat (WHEATMAR21) at $6.88/bu and Milling wheat in Paris (EBMH1) both trading close to eight year highs. Looking at the Milling wheat chart below, the market may unfortunately soon start to worry about the potential political and social implications of a continued rally.
Russia has a history of disrupting the wheat market through restrictions or taxes. The last time it happened was in 2010 after drought destroyed crops. The move caused wheat futures to spike higher and some researchers saw it as an indirect contributor to the Arab Spring uprisings. Having rallied 12.5% so far this month, Milling wheat only trades 14% below the 2011 peak.
In the week to January 12, the speculative net-long held by money managers across 14 major agriculture futures contracts stood at 1.2 million lots, representing a nominal value of $41 billion. The grain and soybean sector accounted for the bulk while the three biggest individual positions being held in corn (375k lots), sugar (220k) and 166k lots.
The number of lots held in on-the-move Chicago wheat only stood at 17k lots, well below the recent peak at 65k lots. Kansas or Hard Red Winter (HRW) wheat which is a high protein variety used in food production has seen elevated speculative interest with the net at 55k lots being close to a 2 ½-year high.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.