War and weather | World agricultural markets in a vice
Russia’s war of aggression in Ukraine has profoundly accelerated the spectacular spike in wheat prices – classed as a strategic grain – and other agricultural prices due to the Russian blockade exports resulting in shortages on the world market.
Double down on the Teucrium Wheat Fund (NYSEARCA: WEAT)
Teucrium Wheat Fund (WEAT), which is based on wheat futures, has traded in a relatively narrow range over the past 30 days between $10.32 and $11.00, and I believe that It’s set to see a strong upward push as the Russian campaign continues in Ukraine and the Indian government’s ban on wheat exports as an accelerator.
The popularity and high demand for this fund was expressed in the New York Times article titled A Market Mystery: The ‘Wheat Whale’ That Came Out of Nowhere, published on April 8, 2022.
For your information, here are the WEAT performances that correspond to the dates of publication of my SA articles as a strong buy:
Over the past month, despite increased wartime hostilities and a halt in exports from Ukraine, WEAT initially traded at $7.66 just before the Russian invasion, then surged but remained within range, closing at $10.91 on April 14 and $11.64 on May 13.
As for Ukraine, the wheat sowing and harvesting season is practically lost due to the ongoing war, especially in the wheat-producing area where the hostilities are currently the most intense. The following table, titled Ukraine: wheat production, provided by the Foreign Agricultural Service, US Department of Agriculture, provides a superb visual of the wheat growing region of Ukraine located in and around the current hostilities.
For investors looking to view corresponding maps from the aforementioned data source for other Ukrainian agricultural products, in particular corn, barley, sunflower seeds and soybeans, it can be accessed in my SA article titled Super agricultural cycle on steroids, published on March 9th. , 2022.
For this reason, wheat exports have been blocked since the outbreak of the war at the end of February 2022.
Although draconian sanctions were imposed on Russia, the West “created” exceptions by allowing the export of Russian food and fertilizers. The problem is that restrictions on financial transactions with Russia have delayed, and sometimes completely prevented, export shipments and deliveries, as importing countries try creative ways to do legal work.
The criticality of agricultural exports from Ukraine and Russia is illustrated in the following chart titled Why the War in Ukraine Threatens Global Food Security, provided by the Food and Agriculture Organization of the United Nations.
Alternative Sources: Wheat Shortages
Countries heavily dependent on Ukraine and Russia for wheat supplies are in dire straits due to severe shortages elsewhere, whether in stocks or crop forecasts, due to weather conditions. Other major wheat producers are facing difficult climatic problems, which have a negative impact on wheat production, and are therefore unable to supply wheat surpluses to countries heavily dependent on exports from Ukraine and the Russia.
india The March heat wave was one of the hottest in their history. According to government sources, they estimate that the heat wave may have damaged more than 25% of their wheat crop. For this reason, the Indian government has banned wheat exports. This extreme protectionist policy eliminates wheat exports as an interim solution for many poor, import-dependent countries that would have received exports from Ukraine and/or Russia.
As India is the world’s second largest producer of wheat, this removes a considerable amount of additional wheat from the world market. For this reason, wheat and other agricultural commodities can no longer be considered fungible and could wreak havoc on world markets.
Furthermore, as a major wheat producer, India has set a precedent by banning the export of a strategic agricultural product due to weather circumstances. Due to India’s huge market share, this could trigger a protectionist domino effect for all other wheat and agricultural commodity exporters.
France is the largest wheat exporter in the EU and was also expected to fill the gap in Russian and Ukrainian wheat exports. Since the French agricultural sector is facing near-drought conditions, a normal yield of wheat crops is in doubt.
UNITED STATES: Many agricultural states are suffering from drought, especially California, especially in the Central Valley, the agricultural heartland. California produces 33% of the country’s vegetables and 67% of the fruits and nuts. Canada is also experiencing drought-like conditions in agricultural areas.
China is one of the largest producers and consumers of wheat in the world. Winter wheat is due to be harvested in June, but crop yields are uncertain due to drought and flooding during the planting and harvesting season.
To make up for any shortfall in domestic consumption, China has the largest foreign currency reserves in the world and can drive up world market prices by crowding out and outbidding poorer countries to import agricultural commodities.
Quality of World Wheat Stocks and Realpolitik
Globally, government agencies have announced that they have sufficient food stocks to meet shortages, or at least buy time to obtain additional food. Understandably, governments may not be upfront with their inventory figures in order to avoid public panic and civil unrest.
What governments may not know is the quality of these storage facilities. Degraded food stocks may be unfit for human consumption but may be used as animal feed. If so, once again governments can resort to mixing the good with food of questionable quality to avoid civil unrest.
The great bike ride
During the aforementioned 30-day period, I believe that, despite the meteoric rise in wheat prices, the market repeatedly failed to fully price in disturbing geopolitical realities and the global collapse in agricultural production linked to the climate.
This trend has been supported by a plethora of highly credible data from private industry and government, including public statements from their respective leaders, and even anecdotal information from farmers themselves that have preceded official government reports and of private industry.
During a crisis, the movement of agricultural commodity prices is often unpredictable, like a wild beast that initially does not respect fundamentals. In this uncertain environment of war and climate, the prices of agricultural commodities will experience violent and rapid vicissitudes and could even significantly undervalue or exceed the fundamentals.
The cascade of events along the agricultural supply chain from farm to fork has impacted every node along the way, compounding the crisis.
For the above reasons, I recommended a strong buy for WEAT and expected a price of $18 per share by late spring.