Expanding global supply outlook contributes to lower wheat prices

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From Nicholas LarsenInternational banker

BWith wheat prices hitting a four-year low of $5.20 a bushel in late July, consumers around the world may be breathing a collective sigh of relief recently. They can increasingly enjoy many of their favorite foods, such as bread, pasta and noodles, at the lowest prices since 2020, and the supply outlook points to increasing oversupply this year and next in many of the world's major export markets, according to many reports.

As the first half of the 2020s draws to a close, few commodities are likely to have experienced a more rollercoaster ride in the first four and a half years of this decade than wheat. With the outbreak of war in Ukraine in late February 2022, wheat futures rose to an all-time high of over $13 a bushel by early March; they remained at elevated levels throughout the second quarter as producers found it increasingly difficult to ship grain exports from the Black Sea. Russia is the world's largest single wheat exporter, with wheat exports from Russia and Ukraine combined accounting for nearly a third of the global total; the blockade of grain supplies in the region sent food price inflation soaring around the world.

Since the fourth quarter of 2022, prices have gradually returned to earth, despite a significant increase in the summer of 2023 when the two sides failed to agree on a permanent agreement to supply grain to the Black Sea. However, with the steadily increasing volumes of grain that Ukraine has been able to deliver to the world market via alternative export routes, prices have continued to fall. Russia enjoyed an exceptionally good wheat harvest last year, which played a key role in pushing prices down to a three-year low by September 2023.

2024 has already seen dramatic swings in world prices. A bushel of wheat started the year at about $6.15, but then fell sharply to below $5.30 by March as global supply conditions continued to ease, with Russian wheat shipments reaching record levels in February. But adverse weather conditions in key wheat-growing regions – including several weeks of heat and moisture deficiency in southern Russia in April, followed by unseasonal frost in May, wet fields in northwestern Europe, and a dry, hot summer in Australia – combined with strong demand, pushed prices up 30 percent to over $7.15 a bushel by the end of May.

Prices were also boosted by news from the world's second-largest wheat consumer, India, in late May that the country would likely lift import tariffs on wheat after June to offset low government reserves, pushing imports up to an estimated three to five million tonnes this year from just 120,000 tonnes in 2023. “Nobody saw this rise in wheat prices coming,” said Ole Houe, director of advisory services at Australian agricultural broker IKON Commodities, Reuters when prices hit a 10-month high. “Millers and even traders haven't covered much from exporters. The supply pipeline is pretty empty if you look beyond June.”

But an expansive global supply situation and significantly improved prospects for the Russian wheat crop have since triggered a dramatic turnaround in prices: from a peak of $7.15 per bushel in late May, prices fell by almost 30 percent in the three months, reaching a four-year low in late July. According to SovEcon, a leading grain consulting company on the Black Sea, the estimate for the 2024 wheat crop was raised to 84.7 million tons in early August. This is higher than the harvest expectation for early July of 84.1 million tons and the 80.7 million tons estimated in June. “The weather conditions for the new wheat crop were difficult in most regions of the European part of Russia, be it drought or spring frosts,” explained Andrey Sizov, head of SovEcon. “However, conditions east of the Volga have been favorable for almost the entire year of 2024. We expect above-average yields in the eastern Volga Valley, the Urals and Siberia.”

And with the Black Sea grain corridor fully operational again, expectations are rising that Ukraine's grain shipments will rebound this year. Data from Ukraine's State Customs Service on July 26 also show that the country – the world's seventh-largest wheat exporter before the conflict with Russia broke out in February 2022 – has exported more than three million tonnes of grains and pulses since the start of the 2024/25 marketing year, compared to just 1.905 million tonnes the year before. Of that total, 1.163 million tonnes were exported wheat, up from 649,000 tonnes in 2023/24. The Ukrainian government also estimated that Ukraine exported $12.4 billion worth of food in the first half of the year, meaning the country is on track to surpass the entire 2023's $22 billion worth of food exports.

Prices have fallen on forecasts that strongly suggest global supply will continue to rise in the 2024/25 marketing year. For example, July estimates from the U.S. Department of Agriculture (USDA) noted that the global wheat outlook for 2024/25 predicts larger stocks, trade and inventories with a more moderate increase in wheat consumption. “Supply was increased by 6.9 million tonnes to 1,057.2 million, mainly due to larger opening stocks in several countries and higher production, primarily in the United States, Pakistan and Canada,” said the USDA's World Agricultural Supply and Demand Estimates (WASDE) report released on July 12. “Projected global ending stocks for 2024/25 are increased by 5.0 million tonnes to 257.2 million, mainly due to increases in the US, China, Argentina, Pakistan and Canada, which more than offset cuts in Russia, the EU and Iran.”

In the United States, wheat stocks, exports and ending stocks are expected to be higher in 2024/25, with stocks rising due to increased wheat production and beginning stocks. “Initial survey-based 2024 production forecasts for other spring wheat and durum wheat indicated increases from last year for both varieties, to 578 million and 89 million bushels, respectively. Winter wheat production is also estimated higher, at 1,341 million bushels, due to larger harvested acreage and yields,” the WASDE report continued. “Beginning stocks are increased based on stocks reported in the June 1 NASS grain stocks. Projected ending stocks for 2024/25 are increased by 98 million bushels to 856 million, a 22 percent increase from last year and the highest in five years.”

The USDA forecast that total wheat production for the 2024/25 season in the United States, the world's fourth-largest wheat exporter, would increase by 134 million bushels to 2,008 million, largely due to an increase in harvested acreage and higher yields. In fact, a July 25 report from the U.S. Department of Agriculture showed that wheat production in the United States, the world's fourth-largest wheat exporter, would increase by 134 million bushels to 2,008 million bushels. Bloomberg confirmed “record North Dakota wheat yields” that will further expand American grain supplies. The state's main crop, durum wheat, will reportedly yield 54.5 bushels per acre, according to data from a tour of the state for wheat traders, millers and bakers, up a whopping 15 percent from last year and the state's highest yield calculation ever. “This is as good as we've ever seen in this number,” said Dave Green, executive vice president of the Crop Tour organizer, the Wheat Quality Council, Bloomberg.

The U.S. Department of Agriculture's National Crop Progress report also showed that the U.S. winter wheat harvest was 82 percent complete as of July 28, compared to 76 percent the previous week. Given this supply expansion, it should come as no surprise that the forecast average producer price for the 2024/25 season was cut by a whopping $0.80 per bushel to $5.70. The July WASDE report cited higher inventories, recent declines in futures and cash prices, and lower forecast U.S. corn prices as reasons for the expected decline.

The bearish argument for wheat prices was further strengthened by the favorable rainfall in Argentina. According to a report from the Buenos Aires Grain Exchange (BdeC) at the end of July, this allowed farmers to complete their wheat sowing for the current harvest season. Wheat sowing for the 2024/25 cycle has thus been completed in all major Argentine arable lands. As of July 26, 98.5 percent of the more than 6.3 million hectares of wheat area had been planted, the report shows. The rainfall was concentrated mainly in the center and east of the main agricultural area, allowing sowing to be completed in both the north and south.

Nevertheless, there are increasing signs that falling prices are tempting large buyers to re-enter the market and make big deals, which could soon lead to the creation of a market floor that will allow prices to firm up again. For example, in mid-July, Egypt bought 770,000 tonnes of wheat in a tender that included 50,000 tonnes of Bulgarian and 720,000 tonnes of Russian wheat. This was the largest purchase since 2022 and suggests that prices are low enough to buy such large volumes.

Egypt is perhaps the world's largest importer of wheat, along with Indonesia and China, and usually makes large purchases at the start of the northern hemisphere harvest in summer or early autumn. But Jean Charzat, a consultant to grain trading company JVC Swiss, also noted that the tender underlined Russian exporters' willingness to sell and that recent adverse weather conditions in the country may not have affected Russian wheat production as much as expected. “In addition, the tender shows how uncompetitive European wheat is, despite a decent harvest,” Charzat added.