Wheat prices hit their lowest point since September 2020, dropping around 29% year-to-date. Short positions, or bets on prices falling, have risen to a three-month high. However, not everyone shares the market’s optimism. David Roche, president and global strategist at Independent Strategy, expects a 13-15% annual increase in wheat prices over the next two years.
Roche believes that disruptions in grain supplies from Russia and within Russia itself pose a significant risk. In addition, climate change and the effects of El Nino could further disrupt crop yields. He points out that the water levels in crucial arteries like the Mississippi, which transports 60% of US grain for export, are being affected by climate warming. Roche argues that these factors, along with the expected increase in demand due to population growth and food security concerns, could lead to higher wheat prices.
Despite Roche’s predictions, wheat prices continue to fall and are currently at their lowest levels since 2020. The US Department of Agriculture reported higher production and stockpiles than analysts expected, further driving down prices. Additionally, Ukraine, a key grain producer, has found alternative export routes despite Russian attacks on its ports. Russia, the world’s largest grain exporter, has also produced large harvests that are expected to get through export blockades.
However, Roche believes that other factors could push prices higher. For instance, the lower Mississippi River is reaching record-low levels, which could impact grain exports. He also emphasizes the potential volatility in Russia and the impact of the El Nino weather pattern. Roche anticipates disruptions in the supply side of grain markets.
Independent Strategy expects crop yields to suffer from higher global temperatures and the El Nino weather pattern. They also assume that the Russia-Ukraine conflict will persist into 2024 and possibly even 2025, further constraining global grain supply. Roche predicts that the stock-to-usage ratio for wheat will decrease by around 5% per year until 2025, resulting in a 13-15% annual increase in wheat prices.
While the market remains bearish on wheat prices, Roche is prepared to wait for returns on these grains. As a strategist known for correctly predicting previous financial crises, he believes that the combination of climate change and geopolitical risks will eventually drive up wheat prices.