In a surprising turn of events, wheat has taken top slot for inclining the most among the commodity asset class in 2017. Albeit, the usual suspects i.e. gold and crude oil have grabbed the headlines in a somber way, wheat has slowly slid in unnoticed. After skyrocketing to a high of $5.90 per bushel in the early half of the year, wheat had dropped by 26 percent to reach the lowest price of $4.34 per bushel at the end of 2016. However, fortunes changed in 2017, as prices leaped by 25 percent to reach the highest price of $5.74 per bushel on July 5. However, prices have declined since then.
A major factor driving the prices for wheat was the reversing oversupply. Since wheat is a relatively resilient crop, it has a high capacity for adapting to different climate and soil types. Hence, unlike other agro markets whose production is more localised, making them more sensitive to adverse weather patterns or poor harvests, the market of wheat has developed to withstand the pressures of geographical diversity. Due to this reason, the crop has always proved attractive to farmers, resulting in a steady incline in wheat production over the past few decades. However, due to low wheat prices, some farmers have been tempted to diversify their crops into more profitable ones. The emergence of biofuels as an alternative source of energy could also perhaps change the dynamics of the wheat market in the long run.
India has also contributed to the declining supply. Being the second largest wheat producers, for the better part of the past 30 years, India has been able to produce and stock enough grains to feed its growing population. On the flip side, however, it has had to import large quantities of grain from Australia, Russia and Ukraine when its harvest was affected by hot and dry weather. In contemporary times, with weather patterns becoming increasingly unpredictable, India could provide the demand required to reverse the glut.
Another potent factor for the rise of wheat is the strong Asian demand. Australia, one of the top wheat producers and exporters, will have to come to grip with the profound changes in the global wheat markets. Also, it needs to contend with the emergence of new powerhouses of grain exports. In the wake of surging supply, some wheat-producing countries have turned to Asia as a new source of demand where the consumption is on the rise. The shares of Australian wheat have declined although it still holds about half of Southeast Asia’s wheat imports. Other large suppliers including USA, Canada and Ukraine over the years have made a mark in the region, now accounting for roughly 42 percent of imports in the region. An example of the change in the dynamics is Indonesia purchasing large quantities of wheat from Ukraine, although geographically Indonesia is much closer to Australia.
Russia, once the largest importer of wheat, surpassed US wheat exports for the first time in 2015. However, the positions reversed in 2016, with the US regaining top spot from Russia. This was attributed to the strengthening of the rouble by almost 18 percent making the grains from Russia less attractive to global buyers.
The record wheat harvest in Australia during 2016-17 comes at a time when the market is already awash with grain and wheat producers were suffering from low prices. Likewise, a combination of unfavourable weather conditions coupled with a dramatic cut in the wheat acreage in the USA and challenging conditions across Western Australia have eroded global inventories that had gripped wheat markets over the last few years. Despite record wheat harvest, which saw 45 percent increase from the past year, drought concerns by the Australian Bureau of Meteorology have projected a damaging outlook for the coming harvesting season. Reports have lowered the forecast for wheat production of Australia to 23.3 million metric tons for the period from October 2017 to September 2018.
Wild fluctuations in foreign exchange have also had an impact on exports. With the weakening Australian dollar against the US Dollar, the demand for Australian wheat had artificially strengthened. However, Australian farmers will feel the pinch and lose further ground should their currency appreciate against the greenback. Analysts opine that the Australian Dollar is widely regarded to weaken in reaction to a largely anticipated interest rate hikes in the USA later in 2017. However, any strengthening of the Australian dollar will have major repercussions, which will potentially send buyers looking elsewhere.
The wheat markets have witnessed wild fluctuations in 2017 which was unheard of in the past. The sharp rallies in late June to early July were welcome news for farmers across the globe. However, all factors point to the fact that wheat prices may have attained the market top in early July and thereafter have started the downward ride.
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at email@example.com