Vai dal Barbieri: a fine-grained analysis of wheat market amid climatic and geopolitical challenges

During a barbecue among friends in a shared garden near my hometown, Cesenatico, I found myself at the center of a lively discussion. Field technicians, agricultural consultants, and farmers, each with their own experience in the sector, exchanged opinions and concerns about the state of wheat crops in Romagna. The level of detail was surprising: they talked about genetic improvement, seeds, weather forecasts, growth techniques, and so on. It seemed more like a Star Trek episode than a conversation between semi-colleagues. However, it was no silly matter. Like in the oil industry, the agricultural sector often feels like a stationary dinosaur. But this perception is far from reality. Technicians and professionals in the agricultural sector have quietly but steadily brought about an evolution, transforming one of the oldest activities in the world into a laboratory of innovation. Through the use of advanced technologies, they have improved crop yields and ensured food safety. This progress not only supports economies but also strengthens our food system, making it less vulnerable to climate challenges and harvest fluctuations.

After these conversations, I wanted to study the dynamics of the wheat market more deeply to utilize the curiosity I had gained, understand the sudden price movements, and the reason for the aggressive positioning of short funds derived from CFTC data. The weekly Commitment of Traders (COT) report from the Commodity Futures Trading Commission (CFTC) provides a detailed analysis of open positions in the futures and options markets. It distinguishes between Commercial positions, used for hedging, Non-Commercial positions, held by institutional speculators like hedge funds, and Non-Reportable positions, referring to small traders. The COT is a tool to assess market sentiment and derive the expectations of major players.

Wheat is one of the oldest traded futures, dating back to 1877 when the Chicago Board of Trade (CBOT) introduced the first standardized contract. This makes it one of the most serious futures series in the long history of financial markets. Wheat is the second most cultivated cereal globally in terms of surface area, after rice and maize. Major global growers include China, the European Union, India, and Russia. However, to fully understand the aggressive fluctuations of the recent period, it’s necessary to look at the import/export trends and the main player countries, as well as the impact of weather events.

In July, attention is focused on the Black Sea area, where the winter wheat harvest is underway. This region has become the “granary of the planet,” similar to Sicily during the Roman Empire. The significant player in this area is Russia, the top global exporter of wheat. Winter wheat represents 70% of Russian production and is mainly cultivated in four districts in European Russia: the southern district, the central district, the Volga region, and the northern Caucasus. Spring wheat, which makes up the remaining 30%, is planted mainly in Siberia, the Urals, and the Volga region.

Thanks to a record harvest of 92 million tonnes in the 2022/2023 season and another 91.5 million tonnes in the 2023/2024 season (data from USDA), Russia has had significant growth in its role as an exporter of this raw material. Russian wheat exports have shown growth of over 21% from 2023 to 2024, also in light of their monetary value, which is already significant, amounting to around 9.5 billion dollars and representing 16% of global wheat exports. In 2024, export volumes are expected to reach about 54 million tonnes, representing almost 1/3 of global exports. Given this pivotal role for global wheat, recent estimates on Russian harvests have raised significant concerns in the agricultural sector. Major analysis agencies, such as IKAR and Sovecon, have revised their forecasts due to worsening weather conditions. In Russia, continental regions experienced delays due to intense heat and drought, while Mongolia saw excessive rainfall delaying sowing. Climatic conditions began to worsen in March and continued until April and May, with significant declines in southern Russia and the Volga region. In early May, the Rostov region and northern regions experienced severe frosts, with nighttime temperatures dropping below zero for several days. These events have limited the potential yield of the harvest, as frosts can damage reproductive organs of the plants, preventing proper grain formation. While plants are entering the maturation phase, the beginning of the harvest season and weather forecasts indicate that further waves of cold could further reduce yields.

On May 31, Agriculture Minister Patrushev announced that Russian exports would be reduced to 60 million tonnes in the 2023-2024 season. At the same time, President Putin mentioned that 1% of the harvest was destroyed, while the Union of Cerealists estimated losses of 1.5 million hectares of crops.
Although some agencies (like IKAR) have revised their estimates upwards in the last week due to improvements in weather conditions and positive news from the Krasnodar region, as stated by Agriculture Minister Oksana Lut, the wheat market continues to be characterized by high uncertainty, mainly due to the absence of reliable data in western Russia, compromising the security and reliability of market data. Moreover, harvest forecasts have been revised downwards by several agencies. In particular, Rusagrotrans and Argus Media have significantly lowered their estimates, with Argus predicting a production of 79.5 million tonnes, the lowest level in the last three years. This figure is considered significantly lower than estimates from major agencies, further accentuating market uncertainty. No other country seems able to compensate for the lack of Russian wheat if production fails to meet expectations.

Another key player in this region is Ukraine, which has suffered severe weather conditions, particularly in the central area, the heart of agricultural production. Added to this is the impact of the war: Russian naval forces have blocked major ports like Chornomorsk, Odessa, and Yuzhny/Pivdennyi. Although a deal was reached to unblock the ports, Russia withdrew from this agreement in July 2023.

Ukrainian exports have greatly weakened, as most Ukrainian grain is transported by sea. Consequently, Ukraine’s commercial partners are seeking alternatives. The European Union, Egypt (which imports 80% of its wheat from Russia and Ukraine), Bangladesh, and the Philippines are heavily affected. Forecasts indicate exports of only 13 million tonnes compared to about 17 million tonnes the previous year, the lowest level of the decade. Ukraine was the sixth-largest wheat exporter globally.
China is also severely affected by climatic events this year, experiencing a severe drought that has significantly impacted the ability to grow wheat and other crops. Recently, the country was hit by devastating floods caused by Typhoon Doksuri, impacting various northern regions. Given recent events and the severe impact on food crops, one of the main producers is facing a real risk of food supply disruption. According to the Financial Times, China is currently increasing its imports. An aggressive entry into the market could have a significant impact on existing trade balances, causing a sort of rationing of exports.

The European Union’s production is also expected to decline, with significant reductions due to excessive humidity in France. Forecasts indicate a reduction in the EU harvest, mainly due to lower yields in France, whose crop conditions are the worst in the last four years, despite heavy rain. The use of margins and residues has been revised downwards due to lower yields and high prices, which should make French wheat more competitive in the animal feed market. Russia and Ukraine’s use of margins and residues has also been reduced, in line with lower production.

Relatively positive news comes from North America, where for the 2024/25 marketing year, wheat production is expected to reach 1.875 billion bushels, an increase of 3% over the previous year. This increase is driven by the growth of winter wheat production, which reached 1.295 billion bushels, driven mainly by the increased production of hard red winter wheat (HRW). Despite some contraction in the production of soft red winter wheat (SRW) and white wheat, the area cultivated for winter wheat remains stable at 25.2 million acres, showing a modest 2% increase over the previous year. The conditions of the crops are improving compared to last year, and there is a noticeable improvement in the relationship between yields and harvest.

On the import side, there are also some new developments. An official from the Indian government has stated that the country has imposed limits on the wheat stocks that traders can hold (and could abolish or reduce the import tax on wheat, currently at 40%), due to years of weak harvests and the constant increase in domestic demand. This could potentially increase India’s demand for global wheat.
Turkey has introduced a wheat import ban that will be in effect from June 21 until mid-October this year. This measure aims to protect Turkish farmers from price declines and other negative effects that could arise during the new harvest season. In case of a shock, one of the most affected countries would be Egypt, which imports 80% of its wheat from Russia and Ukraine. In addition, due to the price increase, the price of subsidized bread in Egypt has increased by almost 300% since June. This is the first increase in over 30 years.

The situation remains highly uncertain in this market: despite the latest data remaining comforting and some agricultural contracts having shown a sudden price drop (like corn), shadows remain over wheat. Crucial weeks lie ahead for the maturation of winter wheat in the northern hemisphere, while crops in the southern hemisphere will soon be planted, given the sensitivity of the topic. I conclude with a curiosity: at this time we are moving from El Niño to a strengthening of La Niña. El Niño is characterized by an abnormal warming of the surface waters of the central and eastern equatorial Pacific. This phenomenon causes changes in global weather patterns. During El Niño, many regions of the world experience extreme conditions such as droughts, floods, and abnormal temperatures. La Niña, on the other hand, is characterized by a cooling of the surface waters of the central and eastern equatorial Pacific, with effects opposite to El Niño, often resulting in diverse meteorological conditions globally. El Niño and La Niña are climate phenomena that are part of the climate cycle known as ENSO (El Niño-Southern Oscillation). These events have a significant impact on global crops, influencing temperature and precipitation in various parts of the world. Historically, the transition from El Niño to La Niña has been associated with rising cereal prices compared to other phases.