Will Price Volatility Continue in the World Wheat Market?  

By: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

Wheat Price Volatility and Global Stocks

In a recent blog from the International Food Policy Research Institute (IFPRI), former USDA Chief Economist Joseph Glauber detailed the disruption that Russia’s invasion of Ukraine has had on the world wheat market over the past year (https://www.ifpri.org/blog/assessing-tight-global-wheat-stocks-and-their-role-price-volatility).  Compared to the recorded price spikes of 2007/08, 2010/11, and 2012/13, wheat futures prices remained relatively stable until Russia invaded Ukraine in February 2022 (see figure).

While world food prices have retreated significantly over the past 11 months (Bloomberg News, March 19, 2023), price volatility in the wheat market is likely to continue with tight global stocks.  When global supplies are negatively affected by an armed conflict such as Russia’s invasion of Ukraine, the availability of stocks should aid in moderating any impact on prices. However, if stocks are tight, their price-smoothing effect is limited, and volatility tends to be exacerbated.

Typically, market analysts measure the tightness of global stocks through the stock-to-use ratio (SUR), defined by ending stocks as a percentage of consumption, which is then multiplied by 365 days to give stocks as days of use.  The SUR for wheat can be measured in several ways: total global stocks, total global stocks minus China, and stocks held by the major exporters (US, EU, Argentina, Australia, Canada, Kazakhstan, Russia, and Ukraine).  If China is excluded from the calculation, projected stock levels for 2022/23 range from 58 to 26 days of use, the lowest level since 2007/08 (see figure).  Not surprisingly, the combination of low stocks, continued uncertainty about the war, and the potential for future supply shocks, means that concerns about global food security have not dissipated (World Bank Food Security Update, March 23, 2023).

Uncertainty Over Continuation of The Black Sea Grain Export Deal and Russian Exports

Key to reducing price volatility is continuation of the grain export deal signed by Ukraine, Turkey, Russia, and the United Nations (UN) on July 22, 2022 (USDA, Foreign Agricultural Service, Grain: World Markets and Trade, August 2022), which was then renewed last November for 120 days (Reuters, March 14, 2023).  Despite the UN and the Ukrainian and Turkish governments stating the deal had been extended for a further 120 days on March 18, 2023, the Russian foreign ministry indicated it had only agreed to a 60-day extension, and that it wanted to see an expansion of its own grain exports to the world market (Financial Times, March 18, 2023).

Not surprisingly, conflicting signals over the timeline of the deal’s extension affected the market, wheat futures rising by 2 percent before March 18 (Bloomberg News, March 14, 2023), falling back the week after the deal was announced, although market analysts expect a risk premium (Bloomberg News, March 20, 2023).  A similar pattern of price volatility occurred prior to and after the deal was renewed in November 2022 (Bloomberg News, November 2, 2022), and no doubt will happen again when the deal next comes up for renewal.

Despite the Ukrainian focus of the grain export deal, the sticking point for the Russians is how to increase their own grain exports.  Russia is now the world’s leading wheat exporter (Bloomberg News, March 31, 2023) (see figure), its strong harvest last year helping to reduce wheat futures prices (Bloomberg News, March 29, 2023).  While Russian crops are not subject to any explicit trade sanctions, companies that trade wheat and other grains must deal with restrictions on both Russian banks and state companies (Bloomberg News, March 29, 2023).  A recent development has been the announcement by major commodity traders Cargill and Viterra that they will stop exporting Russian grain as of July 1, 2023, with Archer-Daniels-Midland also considering exiting its Russian operations (Bloomberg News, March 31, 2023).  How this affects Russian exports to the world market remains to be seen, although some observers think little will change as local traders replace global traders, the Russian government continuing to collect grain export taxes (Bloomberg News, March 30, 2023).

Outlook for Wheat Price Volatility

Low global wheat stocks along with Russia’s repeated procrastination over the Black Sea grain export deal, suggest price volatility will continue for the foreseeable future.  At the same time, grain exports by Ukraine to central European states has affected farm revenues in Poland, Romania, Slovakia, Hungary and Bulgaria, eroding political goodwill (Bloomberg News, April 2, 2023), placing pressure on the European Union (EU) for tariffs to be restored on imports from Ukraine (Reuters, March 31, 2023), which would likely push down wheat and other grain prices.

Wheat on the Chicago Mercantile Exchange (CME) is currently hovering around $7.00 per bushel, in line with the estimate used in the OSU Extension Wheat Production Budget for 2023.  As of April 5, 2023, CME prices are $6.94/bushel for July 2023, $7.25/bushel for July 2024, and $7.26/bushel for July 2025.  The OSU Extension wheat budget estimates $7.00/bushel and evaluates four yield scenarios (59 bushels/acre, 74 bushels/acre, 89 bushels/acre, and 92 bushels/acre).  Estimated returns at each yield level more than cover the variable costs, but the numbers are negative when evaluating returns above total costs.  Straw sales can improve the returns, but there is the additional concern of the value of nutrients removed.

We encourage you to keep informed of market movements and projections, and utilize OSU Extension enterprise budgets (https://farmoffice.osu.edu/farm-management/enterprise-budgets) when making farm management decisions.