Head of Commodity Strategy
Summary: Following on from the recent surge in fuel and gas prices, another and equally worrying rally is currently taking place across some of the world's key food staples, most notably wheat where the price of high protein milling wheat in Paris has reached record levels. The rally has been driven by a potent combination of tight supply following a troubled growing season in North America, rocketing fertilizer prices and strong pent up demand from key buyers in the Middle East and North Africa
Following on from the recent surge in fuel and gas prices, another and equally worrying rally is currently taking place across some of the world’s key food staples. Most notably wheat where the price of high protein milling wheat in Paris earlier today breached the record high from 2008 at €295.5 per metric tons, while over in the U.S. the cost of Chicago wheat trades above $8 per bushel for the first time since 2012.
Paris Milling wheat trades at record levels, thereby exceeding the high levels that was partly to blame for the Arab Spring uprising a decade ago.
A poor harvest in North America together with a 14% year-on-year decline in exports from Russia, the world’s largest shipper, has triggered increased demand for European sourced wheat, and with the prospect for another potentially challenging crop year in 2022, caused by a returning La Ninã weather phenomenon and high fertilizer costs, some of the major importers have recently been stepping up their pace of purchase.
These among others include China as well as countries in the Middle East and North Africa. As an example, Saudi Arabia this weekend booked 1.3 million tons of wheat in a tender, according to Bloomberg almost double the amount expected. Top importer Egypt which so far has trailed its buying pace from last year by more than 20% has stepped up its purchase activity after recently having declined the prices being offered. A sign that countries not only in North Africa but elsewhere as well need more supplies to cool local food prices, and to secure supplies ahead of winter.
The US Department of Agriculture in its latest update from October put world wheat ending stocks at 277 million tons compared with 321 million tons a year ago. The next update from the USDA will be released on November 9 and prior to that the UN FAO will publish its monthly food price index this Thursday. The index which comprises 95 price quotes across five different categories from vegetable oils, cereals, sugar to dairy and meat reached a ten-year high in September, representing a year-on-year increase of 32.7%.
Adding to the current unease about the prospect for the winter and spring production of wheat and other key crops, has been the recent surge in the cost of fertilizer. The market has been hit hard by the natural gas crunch which in Europe has forced a number of nitrogen-fertilizer plants to halt or reduce production. A gauge of western European prices for ammonia, used to make nitrogen fertilizer, has recently surged to a 13-year high above $900/tons, close to triple the average price seen during the previous five years. These developments raising the risk for either a lower usage of fertilizer or a switch to less fertilizer intensive crops.
With buyers increasingly competing for supplies the market will look for some relief from the upcoming in harvests in Argentina and Australia, taking place from now until January. The outlook for production in both countries look promising with the Argentine crop expected to reach 19.8 million tons (Source: Buenos Aires Grains Exchange) and 32.6 million tons in Australia (Source: Abares), with is just 2% below last season’s record output.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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