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The cure for low prices is low prices

30 April 20243 min reading

Dennis Voznesenski
Associate Director Of Agricultural And Sustainable Economics
The Commonwealth Bank of Australia

“Our forecast is for a gradual rise in global wheat prices through Q2/Q3 2024, with larger price upside limited by a continuous flow of Black Sea wheat, South American corn, and the upcoming northern hemisphere winter wheat harvest. As we head into 2025, however, prices are expected to strengthen. While global wheat stocks are by no means at historic highs, geopolitical uncertainty is the highest in decades, leaving markets very vulnerable to disruption.”

Global wheat prices have halved since the record peaks set in 2022. Prices have been driven lower by a large resupply of wheat and other feed grains and at the same time lacklustre demand. The lower prices have come at the same time as input prices have remained above historic averages. The result is squeezed farmer profit margins. Reduced profit margins have begun to impact farmer decision making on marginal cropping land, with planting intentions already rolled back in parts of North and South America. We believe this acts as an indicator for a low in markets.

Our forecast is for a gradual rise in global wheat prices through Q2/Q3 2024, with larger price upside limited by a continuous flow of Black Sea wheat, South American corn, and the upcoming northern hemisphere winter wheat harvest. Moving into year-end and into 2025, however, we expect prices to rise more notably.

The news tends to focus on one large development that causes a large rally. However, when diving deeper, there is typically a gradual build-up of factors, one on top of the other, until the supply and demand balance tips. If we try to dissect our view further, it could look something like this: the first factor could be increased import requirements of corn into Southern Africa due to a significantly drought impacted crop. Second, could be Brazil’s Safrinha corn crop turning out smaller than consensus. Third could be drought in Canada continuing and stunting wheat yields as we pass mid-year. Fourth could be a poorer than expected Australian harvest due to drought in Western and Southern Australia. Fifth could be the market realising Russian yields in May 2025 are smaller than expected. Russia has experienced a multi-year run of average to record yields, the chance of another one looks slimmer. And finally, sixth, the straw that breaks the camel’s back: rising import demand. With markets expecting central banks to start cutting interest rates in Q3/Q4 2024, the effect should start flowing into improved import demand in 2025. At some point in the first half of 2025, traders looking to fill an increasing number of vessels may run into tighter global wheat stocks, beginning a stronger price rise.

While there are a lot of unknowns, a lot of factors are already in play. We know it’s dry in Canada’s western prairies; we know it’s dry in Western Australia; we know that farmers in different parts of the world are starting to plant less; and for now the expectation is for lower interest rates. This doesn’t even factor in a halt of Ukraine’s’ or Russia’s exports due to conflict, or the fact that in a lower price environment farmers tend to reduce nitrogen use which puts downward pressure on yields.

Between now and Q4 2024, global availability of grains is expected to remain ample, and prices subdued. As we head into 2025, however, prices are expected to strengthen. While global wheat stocks are by no means at historic highs, geopolitical uncertainty is the highest in decades, leaving markets very vulnerable to disruption.

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