The EU (ex UK) all wheat production was down 9% yoy


9% 38% 2021


The UK production was down 38% yoy according to the USDA figures


IS WHEAT DRIVING FOOD INFLATION?


Wheat markets have been on one hell of a run, and whilst this doesn’t seem to be much of a surprise with ‘inflation’ being the hot topic at the moment and commodities charging higher across the board, it has been a remarkable move in its own right and will have its own inflationary consequences as these higher prices are factored in throughout the various supply chains.


Wheat has a wide variety of applications; for human consumption in bread, biscuits, cakes, pasta, pastry, confectionary and so on, in animal feed rations and industrial use, for example in the production of bioethanol . An increase in the price of wheat will certainly have a noticeable impact on the cost of day-to-day living.


WHAT IS DRIVING THE WHEAT MARKETS? If we rewind the clock, to the start of 2020 and just prior to when Covid hit the Western world, wheat markets were trading largely in line with the previous few years. Then Covid-19 was declared a pandemic, markets sold off with the expectation of demand shock, and volatility was high. Things soon recovered and what emerged was a demand driven bull run with countries looking to build strategic reserves. In Europe (the EU ,ex UK) all wheat production was down 9% yoy and in the UK production was down 38% yoy, according to the USDA figures, all adding to the bullish sentiment.


Chart 1: London wheat & Matif Milling wheat front month continuation


The 2021 year started with a corn story, whilst looking at a strong demand picture (especially from China) there was planting delays in Brazil, then drought in parts of North and South America that diminished what was once expected to be record corn crops. Corn even ended up trading at a premium to Kansas and Chicago wheat. Whilst corn in most applications isn’t a suitable replacement for wheat, wheat can often be used as a suitable replacement for corn. With the prices of corn on the run, wheat was a follower.


Whilst the corn markets remain well supported, they have subsided from the highs and wheat is now driving its own price direction.


Front month continuation Chart 1 looks at ICE London feed wheat (purple) and Euronext Matif milling wheat (green) over the last 2 years.


USDA’s Nov21 WASDE stocks to use ratio of wheat for the world’s major exporters is at a record low, the market needs to maximise on Australian, Argentine and Russian supplies. They all may potentially be at risk with rain causing quality concerns in Australia, Russia threatening export quotas and even higher taxes, and Brazil allowing the import of Argentine GM flour but not GM wheat.


Source: Thomson Reuters 10 | ADMISI - The Ghost In The Machine | Q4 Edition 2021


The 2021 year started with a corn story, whilst looking at a strong demand picture (especially from China)


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