Wheat Bulls or Bears for the coming year?

A member of the grass family under the name Triticum, wheat is a type of cereal grain. This spiky grass-like grain yields a dry, one-seeded fruit known as a kernel, which is processed to form flour and is consumed all over the world as one of the world's most significant staple foods. It is the second-most widely eaten cereal grain worldwide. Because wheat contains the most gluten of any grain, it is particularly vital for manufacturing bread as well as other bakery goods. This crop is indeed planted for the livestock as forage.

Following oil, coffee, gas, and gold as the most traded commodities, wheat comes in at five. It provides about 21% of the food consumed worldwide, and its global trade in goods is larger than that of all other crops put together. In addition to being a crucial component of bread, flour, & pasta, wheat is also used to make whisky and beer.

The global economy heavily relies on the agricultural sector. Its many roles include ensuring food security, spurring industrial and commercial growth, reducing poverty, reducing income gaps, providing environmental services, and undergoing structural changes. One of the most significant commodities in international trade continues to be wheat, which has a long history in human civilization.

It is currently the cereal that is grown the most commonly in the world.

By 2027, it is anticipated that the worldwide wheat market would be worth US$271.679 billion.

Significant Obstacles within the Wheat Market

The following present the greatest difficulties for wheat growers worldwide:

Fusarium Head Blight is a form of fungal disease that affects wheat crops and causes yield losses because of infection. This degrades the grain because it is unsatisfactory to end users.

The stem's rust kills the whole grain of wheat:

The most frequent problem is controlling pests and insects, which necessitates a comprehensive strategy because they can damage large quantities of wheat grain.

Effect of COVID-19 on the World Wheat Market:

The effects of the COVID-19 epidemic in 2020 on the economy and society worldwide are unparalleled by any other phenomenon. Economic activity has been significantly reduced or completely stopped in most geographical regions and throughout numerous industries, including transportation, tourism, hospitality, and automotive. The government's efforts to shut borders and prohibit exports also had an impact on the outcomes. Wheat and rice both saw a price increase. Wheat hardly felt the effects of the COVID-19 pandemic. Since bread and flour are stapled byproducts, any price change usually has little effect on consumer demand for these vital foods.

Geographical Analysis:

The European Union has predicted to increase its production of wheat greater than any other industrialized country due to the high yields, low costs, and good quality of the grain. By 2029, emerging nations are predicted to raise their portion of global production by a negligible amount, adding 36 Mt to the world output in contrast to developed nations. India is expected to expand its wheat production, partly because of its minimum confidence price program, which ensures farmers a steady income. Russian and Ukrainian output increases were attributed to a mix of domestically manufactured hybrid seeds and fertilizers, affordable electricity, major commercial farms, and favorable soil.

Wheat price-determining factors:

The price of oil, the world's population, income growth, the cost of replacements, and climate factors that affect supply all play a role in determining the price of wheat.

Due to the Ukraine crisis (which accounts for 10% of the largest producer), wheat prices have lately increased, and they may continue to rise due to the conflict's detrimental effects on supply.

Supply-side variables

1. Oil costs

For two reasons, the price of wheat and the price of oil are closely related. Oil is a significant input expense, to start. Farmers will pay more to use equipment like tractors if oil prices rise. The cost of producing fertilizers, which need a significant amount of energy, goes up as energy prices rise. Additionally, it will have a direct impact on the price of shipping wheat around the world. The requirement for biofuels is the cause of a second link. Growing biofuel crops like corn, rapeseed, and soybeans is more in demand as oil prices rise. The conversion to biofuel crops will reduce the amount of food-grade wheat available, and this decrease in supply will drive up costs.

2. Land productivity

The amount of wheat produced in the post-war era increased dramatically, largely due to farmers' greater productivity but also because more area was used for producing wheat. This results from the application of insecticides and fertilizers, both of which can raise yields. Additionally, greater agricultural centralization can result in economies of scale, allowing farmers to grow wheat on a much bigger scale than in the past. How much-increased efficiency growth farmers are going to achieve in the future is a crucial element. Future supply issues could result from a variety of sources, including climate change and a loss of soil fertility, in addition to new technologies (such as contentious GM crops).

3. Aspect of Climate

Wheat is a commodity that is dependent on a favorable climate. Even though it is among the most adaptable crops and can be grown in many climates, farmers will report lower crop yields in the event of extreme heat, cold, or lack of rain. For instance, in 1996, the price of wheat increased sharply due to unfavorable weather, particularly in the American Midwest. Crop damage brought on by a poor winter and a drought reduced productivity and raised prices. Strong overseas demand and further output declines in grain contributed to the price increase.

4. Global political variables

Because Ukraine, Russia, and other former Soviet Union nations are important producers of wheat, the Russian invasion of Ukraine in 2022 will have a significant impact on the availability of wheat. In 2019, 8.9% of the world's wheat shipments were grown in Russia and 14% in Ukraine, accounting for roughly a quarter of all exports. Supply has been affected by the conflict in Ukraine, and sanctions imposed on Russia have an impact on the supply they will offer to the global market.

5. What amount of wheat is sown?

Crops can be chosen by farmers to plant. Farmers will plant more now and produce more wheat the following year if they anticipate high wheat prices. Farmers may reduce production if they anticipate low pricing, which could result in a decrease in supplies the next year. Therefore, there is a delay with one growing season before farmers can react to market signals. Given that some wheat can be held to serve as a buffer, this illustrates why supply might be somewhat relatively elastic in the very near term. According to the cobweb theory, the commodity price can fluctuate because of a lag in responding to market signals.

6. Government involvement

Governments may interfere to influence the price of wheat since it is such a delicate commodity, especially in emerging economies where it has a significant impact on living standards. To keep food prices down, the government may provide wheat subsidies. Nevertheless, artificially decreasing the price will result in increased demand and further upward pressure on market prices. A different option is for the government to put tariffs just on the import of processed wheat goods like pasta. Wheat will become more expensive in nations with increased tariffs as a result of this.

Demand side factors

1. Population Development

The demand for wheat will increase as the world's population increases. Population increase and rising wheat demand are strongly correlated, with average wheat demand increasing.

2. Increased income in emerging nations

Increased economic expansion, particularly in developing nations, is a major driver of the rise in demand for wheat. Africa & Southeast Asia are the two regions that import the most wheat.

Increased global wheat imports are evidence of rising demand. The output of meat and dairy products may also increase as income levels do. As wheat is farmed for use in feedstuffs rather than being sold for human use, this might indirectly raise the price of wheat.

3. The replacement effect

There are many close replacements for wheat. Customers can buy rice, corn, soy, and rye as substitutes for traditional sources of carbs. Wheat prices will rise as a result of increased demand if the price of these crops rises. Reduced pressure on the consumption of food, in general, will result in lower wheat prices as well.

4. The US dollar's value

Dollars predominate in the wheat price. Therefore, a rise in the value of the dollar will raise the actual price that other nations will be required to pay for wheat. A dramatic decline in the value of the Egyptian pound versus the dollar, for instance, would result in higher effective prices for Egyptians as purchasing wheat in dollars would become more expensive.

5. Suspicions

Investor speculation may have an impact on wheat prices. Investors may purchase wheat today and keep it if they believe the price of wheat will rise in the future.

Market Participants:

At the year's conclusion, factors influenced by players, traders, and funds increase unpredictability.

Markets have recently witnessed a higher rise in "Bears" driving down the price of global wheat, resulting in all-around "short" holdings.

Participants will inevitably make minor adjustments to their trading activity and positions as the year draw to a close to either lock in profits or liquidate losses.

As many businesses wind down and the Christmas season draws near, trade volume may decline.

Interesting price swings have frequently been observed during this time due to the combined effects of position switching and volume reduction.

The impact on the market of any significant urge to purchase or sell will logically be higher if there is a smaller volume. As a result, prices will increase more than they otherwise might.

Reduced consumption:

Due to a drop in food, seed, and industrial use, the USDA reduced its prediction for 2022–2023 worldwide wheat utilization from 0.60 million metric tonnes to 785.1 MMT.

The AHDB said that worries about the world's demand for grains were also fueled by the Covid-19 limits in China & recessionary anxieties. After significant objections to the rigorous zero Covid policy, China has eased some of the restrictions.

Production of Wheat

The wheat market in 2022 has primarily been dominated by a fierce war, although output records cannot be disregarded.

There have been reports of a record wheat harvest in Russia, with estimates ranging from 91 million metric tonnes to more than 100 million tonnes.

Australia is also anticipating its biggest crop yet, with ABARES projecting 36.6mmt, an increase of 1% from the previous record set last year.

On the other hand, Argentinian reports consistently exaggerate the size of the wheat crop. Total production statistics have decreased from 21mmt to the present 12.4mmt, with the likelihood of more declines in production as we get approximately half of the crops harvested.

Conclusion

Since the highs in mid-May of 2022, the wheat markets have appeared to be in a "Bear" mood, with the last significant "Bulls" appearing more than a couple of months ago. The estimation for the 2023 market price is still in an oscillating situation. However, being the staple food for many countries wheat market tends to grow stronger as always. Hence there can be a stinger in the tail because there are strategies to finish out or adjust, along with the possibility of decreasing trade volume. In a quieter market, "Bulls" might find it difficult to acquire, while "Bears" might find it difficult to sell the desired volume.