Inflation and World Events Contribute to Volatility and Record High Wheat Prices
Ukrainian Crisis Creates Opportunities and Long-term Questions for Farmers
Inflation, the Russian devastation of Ukraine, and the anticipation of shortages are driving grain prices to record-setting heights in 2022. This sets American farmers up for a solid year but also raises questions about what will happen after the current crops are harvested and sold.
As most know now, Ukraine is the “breadbasket” of Europe. It has a large agricultural economy and produces about 3% of the world’s wheat. By contrast, the U.S. and Canada together produce half the world’s wheat, and Russia produces about 11%. That makes Ukraine’s historic contribution sound a bit small, but when it comes to food commodities – like crude oil – small disruptions in one part of the world can ripple across the globe.
Like farmers in most of the American Midwest, Ukrainian farmers produce winter wheat. This means any significant disruption in their supply chain will directly impact Kansas wheat farmers.
Wheat today is selling around $11 a bushel and has recently peaked above $12 in some locations. It has been uncharacteristically volatile in the first quarter of 2022, sometimes rising by 75 cents a bushel in a single day. Today’s prices would have been unimaginable three years ago, when wheat was selling at $3.50 a bushel.
Of course, some of the profits from these prices will be offset by inflation (which is currently around 7.5% nationally) and the sky-high price of fuel.
All these factors – inflation, high grain prices, and an uncertain geopolitical situation – will have ramifications this year both for consumers and farmers.
Impact on Consumers
Here in the U.S., we will not face a food shortage. However, the value of what we consume will be higher. Inflation on food prices will continue to rise under pressure from both the economy and world events. As with all markets, agriculture is driven by the laws of supply and demand. If we can export wheat and other commodities and sell them for higher prices in foreign markets than we could get for them here at home, doing so will drive up prices in the U.S.
Wheat prices rose significantly last year, surpassing $8 a bushel in the fourth quarter. But in late February it swung severely higher.
This is all anticipatory. There are no real shortages now, as is apparent in the millions of bushels of wheat out in the fields with tarps over them. There is enough wheat in the pipeline today to take care of our needs domestically, but the shortages will show up in the next harvest, when Ukraine-grown wheat will be missing from the international marketplace.
Since the current wheat crop was planted in the fall when there was no anticipation of war in Ukraine, it’s too late for domestic farmers to increase production now.
Globally, consumers will feel the impact on prices of foods containing wheat more than other commodities. While we grow more corn than wheat in the U.S., much of it is used as livestock feed and the same with soybeans. Wheat, however, is mostly raised for human consumption. While farmers will feel the impact on the costs of feed, livestock can be fed alternative feed. Human consumers do not easily shift to other foods when wheat prices rise.
Outlook from Here
When the conflict first started, there was a perception that Russia would march in, and it would soon be over. Now, it doesn’t look like that’s the case. This is a long-term battle which raises implications for the impact on agriculture both in Ukraine and the rest of the world. How long will Ukraine’s farms be taken out of service? Even once it’s back in service, how much of it will not be fit to grow crops on because of war-related damage and contaminants? How long will it take to get Ukraine’s farmland back into production?
Here at home, farmers need to stay the course.
- To whatever extent you’ve locked in prices for your crops and inputs, sit tight. You will make money at that level even if wheat prices continue to rise. Don’t get nervous and don’t look back.
- If you didn’t lock in prices, there’s still an opportunity to lock in at a profitable level. The price of wheat is at $10.90 per bushel. Keep an eye on it but don’t be greedy. I heard a farmer recently joke that he was holding out for $25 a bushel. That’s not likely to happen, as the market has already adjusted to meet the demand.
- Looking to next year we need to keep our eye on changing demand. There may be an opportunity to shift crops to meet the world’s needs.
Despite the volatility and uncertainty in today’s market, this may be a good trial to see how capable we are to meet demand in the future. The world only has a certain amount of farmland and it’s shrinking. We will need to produce twice the amount of food on the same or less available land by 2050 with anticipated world growth. It’s a good time to consider what your role in meeting future demands will be.
If you would like to have a conversation about weathering the current volatility in the marketplace and taking advantage of any opportunities, contact your Adams Brown advisor.