By Lyticia Wouguia, Christopher Delfin and Piratharsan Poologanathan
Price movement recap
The graph above represents wheat prices of the year 2020. To begin with, due to the outbreak of COVID-19, some major commodities have been highly affected. However, wheat has seen minimal direct impact from this pandemic. This is because wheat has a relatively stable demand and is considered one of the most inelastic commodities. But, by looking at the first part of the pandemic outbreak (Feb-April), prices are dropping continuously due to disruptions in demand from the worldwide lockdown. Meaning also that there are less exports and less production happening. Then, there is a peak by mid-March which is due to new harvests from farmers. Furthermore, coming at the end of the year, prices are rising as there is a continued reduction in production in the EU and the Black Sea due to scorching weather and this is a big risk for tighter supplies in those nations that dominate the international export market.
Supply & demand
By reaching the end of the year, USDA forecast world wheat production at 768.48 MT in 2020-21. A difference of 4.17 MT from 764.32 MT in 2019-20 which is the current record. Overall, the EU, Ukraine and the United States will be producing and export less as they will be facing unfavorable weather conditions. Meanwhile, Argentina, Australia and Canada and some Asian Countries will have better performances as exporters.
In addition, due to the second wave of the virus, countries are focusing more on domestic consumption rather than foreign trade, which also increases their own wheat stocks. As seen below, world ending stocks is at 321MT and half of these stocks is held by China, around 163MT. Regarding the influence of the Covid-19 pandemic and the panic buying of long-term storage food products, such as pasta, has not greatly affected the demand curve worldwide. It has only affected local demand at small fluctuation.
Here below is a graph:
Global ending stock has a major effect on the supply. As you can see on the graph below, the ending stock is increasing each year. This increase is explained by the fact that China and India have increased their stock due to the government’s encouragement through subsidiaries. However, as we can see on the graph the price tends to increase, because China and India do not export wheat.
Chicago SRW Wheat Futures Quotes
The Chicago soft red wheat, which is the largest wheat derivative, the futures are above the spot price. We can observe that today the market is not supposed to lack in production, and it will stick to the growing demand.
Recommendations
Due to the seasonality that the wheat market depends on, the price varies a lot on the harvest period or. Actually, we are facing here, a normal curve from December to March, and then the price stays stable till May and finally decrease. This cycle seems to repeat itself on year 2021 and 2022. In an investment perspective for the next 3 months, it is in the best interest to store.
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