Global commodities markets are caught in a perfect storm since the pandemic began three years ago. First, the mismatch between supply and demand due to lockdowns and slowdown (2020) in consumption reduced output in the following year (2021). As if this wasn’t enough, the outbreak of war between the two Black Sea commodities giants has sent the markets into a tizzy, with little certainty over how long it would take before the markets finalize stabilize.
Consider how the disruption in natural gas supplies first propelled fertilizer prices – especially urea – later cascading across almost all agro-based commodities from cotton to corn. Now, even though prices of cotton have plummeted as rich economies enter into a carefully induced recession, same cannot be said for wheat, which is still witnessing decade-high prices.
What sets apart wheat from cotton is that demand for basic grains may not necessarily plummet the same way as that of garments and apparels during recessionary period. In fact, world wheat demand as forecast by USDA for the ongoing marketing year (2022-23) is virtually unchanged over last year, slowing down by mere 50 basis points. Moreover, USDA projections indicate that global supply of wheat during the current and previous years may exceed demand by on average 10 million metric tons (MMT).This is unlike preceding three years when the market was barely in equilibrium and global ending stocks were at all-time lows.
Therefore, if the balance is returning to world markets, why have prices continued to behave stubbornly? That seems to have more to do with disruption in supply chains, than anything else. As wheat exports out of Black Sea ports have been disrupted, large producers have begun to look inwards, staying on the sidelines to build domestic reserve stocks rather than encouraging exports.
Consider the following: 11 out of top 15 wheat producing countries also feature among world’s top 15 wheat consuming nations, owing either to large populations and/or high-income status. Outside of China, India, European Union, US, Russia, and Pakistan – the list also includes medium-sized population nations such as Iran, UK, Turkey, Canada, and Ukraine, where large scale domestic cultivation of wheat ensures stable local supply and prices, resulting in high demand.
Over the past six months as Ukrainian exports disappeared from the world markets, two adverse trends appeared that have kept the world wheat market volatile. First, large producers such as countries such as India heavily clamped down on grain export in a bid to maintain domestic food security and price stabilization. Meanwhile, surpluses fell across the top 15 producers, pushing out large suppliers from the market.
Between MY19 to MY21, the select-11 regions which together contribute 83 percent of world’s wheat output (but are responsible for 70 percent of world consumption), produced 120MMT tons of surplus grain, equivalent to 20 percent of their combined output. During MY22 and MY23, the combined surplus from these markets has fallen to 94MMT (or 12 percent of output).
Although Russian invasion of Ukraine and subsequent reduction in Ukrainian wheat output has played a large role in causing this situation, it has been substantially beenexacerbated by poor crop in India, USA, Canada, Pakistan, Argentina and several other major producers during 2022.
As big producers with large surpluses withdraw from the global wheat trade, world food security will face grave risks. As many as 120 small and medium sized countries around the world import some or a large part of their local wheat demand. Unless the conflict in the Black Sea concludes, the uncertainty in the global wheat market will continue to persist – and may even be exacerbated by the prospect of crop failures in countries such as Pakistan at the receiving end of climate change. Large consumers with significant grain deficits should be very afraid.
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