When It Comes to Wheat, It’s a Russian Bear


A recurring theme that we’ve examined in the past is that the futures price of a commodity doesn’t always seem to connect to the fundamentals. Shouldn’t prices go up when ending stocks go down? And down when ending stocks go up? While U.S. current and anticipated ending stocks often have a significant influence on price for a wide variety of agriculture commodities, the story is quite different for wheat. Namely, competing fundamentals (especially the interplay between domestic and global fundamentals) can drive prices in an unanticipated direction. Let’s take a look at what’s been happening with Russia and the strength of the U.S. dollar to understand how fundamentals have come together to drive down wheat prices.


Supply – and price – continues to be weak for wheat.


Between the 21/22 and the 22/23 crop years, U.S. ending stocks dropped 15.4% from 674 mb in 21/22 to an estimated 570 mb in 22/23. (Translated to global metrics, U.S. supply fell from 18.3 million metric tonnes [mmt] to 15.5 mmt.) In contrast, Russia’s 92 mmt bumper crop for the 22/23 season (equating to 3.38 billion bushels) dwarfed U.S. production. Furthermore, the Russian increase in exports from 21/22 to 22/23 was 14.5 mmt, or around 533 mb. In other words, Russia’s increased exports alone between 21/22 and 22/23 were almost as large as the U.S. 22/23 ending stocks of 570 mb.


Nonetheless, world supply (less China) experienced a net decrease, shrinking by 3.71 mmt from 136.0 mmt to 132.3 mmt. With that decrease, anyone could be forgiven if they expected an increase in prices, or at the very least steady prices. However, prices fell instead, and rather sharply. Take a look at the chart below, focusing on the line representing the change in prices for Chicago wheat since October 25, 2021. Since around May of 2022, prices have fallen almost a net 30% from the price offered in November of 2021 after rising between February and around June of 2022. This begs the question – what’s the driving force behind the drop in prices?


Source for chart above and other ending stock estimates in this report: March 2024 WASDE report


The weakness of the ruble has a significant impact on the price of wheat.


The U.S. dollar is the global currency to buy and sell wheat, and it’s logical to assume it has a significant influence on the price of wheat. By extension, it makes sense to ask whether the U.S. dollar strengthened relative to world currencies to such an extent that U.S. wheat became overpriced, especially as global supply declined in 22/23. To answer that, take another look at the chart above which shows (in red) the percent change in the price of Chicago wheat compared to the U.S. dollar index (in green), as measured against a basket of currencies. Contrary to an anticipated change in the strength of the U.S. dollar index in the face of wheat declines, the index held fairly steady. This lends fuel to the thought that the strength of the U.S. dollar alone has not influenced the big decline in wheat price.


What, then, has influenced the decline in price? Because Russia is a huge exporter of grain, it’s more important to look at how the U.S. dollar has fared specifically against the Russian ruble. For context, take a step back and think about what’s been happening to Russian exports since the invasion of Ukraine in February of 2022. The U.S., the E.U., and the U.K. along with countries such as Japan, Australia and Canada have imposed over 16,500 sanctions against Russia, including freezing assets and restricting imports and exports. As a result, the demand for rubles has continued to decrease because there are fewer items being purchased from or sold to Russia. Accordingly, the U.S. dollar has strengthened in comparison (that is, you can buy more and more rubles with a U.S. dollar). At the same time, wheat is one of the few exports from Russia that has not been sanctioned, so Russia has a huge incentive to export more wheat to expand their economy. Bottom line, Russia is exporting more and more wheat, accelerated by the low relative cost of the ruble.


The chart below demonstrates just how much influence the price of the ruble has on the price of grain. Note the inverse relationship between the price of Chicago wheat and the weakness of the ruble against the U.S. dollar. As the number of Russian rubles per U.S. dollar rises (that is, as the ruble weakens), we see the price of wheat decline. That relationship is especially evident between the two purple vertical lines between the dates 9/25/2023 and 1/22/2024. As rubles to the dollar rises, the price of wheat declines. Similarly, as rubles to the dollar falls, the price of wheat rises. For reference, the blue vertical line on 2/21/2022 marks the first day of the invasion of Ukraine.


A notable point in this chart is where the ruble and wheat converge on the chart (circled). Just prior to the circled area, the ruble began to devalue relative to the dollar and the price of wheat continued to fall. As of 3/04/2024, the ruble has lost about 29% of its buying power and Chicago wheat has lost about 27% of its prewar value. You can also see in this chart that the U.S. dollar index is relatively stable. Therefore, if we are to compare the relative influence of the U.S. dollar index to that of the value of wheat, the value of the Russian ruble relative to the U.S. dollar has apparently far more influence on the price of wheat.



A major recovery in wheat prices does not seem imminent – plan accordingly.


What do we have for the 23/24 crop year? In the U.S., wheat ending stocks per the March WASDE are estimated to return to 21/22 levels of 673 mb (vs. 674 in 21/22 and 590 in 22/23). Russia is also estimated to increase exports to a whopping 51 mmt. On the other hand, the 23/24 WASDE global estimates (less China) is forecasting another decline in supply from 132.3 mmt to 126.8 mmt. In the meantime, the war continues, and sanctions have only increased as Ukraine allies continue to apply more pressure to Russia. Has this changed market expectations, and therefore could it trigger a change in prices? It’s hard to tell. However, unless something occurs to change expectations, wheat prices appear to be weak for some time to come.


It’s worth emphasizing again and again – prices change when expectations change, and those changes are nearly impossible to fully anticipate. Fundamentals might lead you to think a market is going in one direction. If you miss one fundamental that overwhelms the other factors, suddenly the market is going off in another direction, leaving you behind. And it’s always easy to explain the fundamentals after a market shifts direction. It’s quite difficult to adequately anticipate all the fundamentals before a shift in direction.


Instead of trying to guess where the market is going, it’s better to plan for wherever the market might go. That means making a plan that is flexible and adjusts as the market changes. Build a plan that helps you protect your price in the event the market goes up – or down. And be prepared to capture market opportunity as it comes to you rather than hoping to hit the top of the market.


Total Farm Marketing can help, as we’ve helped farmers for almost 40 years.


Have questions about how you can build a plan to help you in any market environment, or questions about your plan?


Call us at 800.334.9779.


©April 2024. Total Farm Marketing. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices may have already factored in the seasonal aspects of supply and demand. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Total Farm Marketing and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing refers to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. A customer may have relationships with any of the three companies.


Scott Masters

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