Is the wheat price at too high a level?

The September contract on the Matif in Paris closed on Thursday, May 19, at €422,25 per tonne. The price has therefore fallen €16 since Tuesday's price record. The stock market opened slightly higher again on Friday morning, with a price of €423,75 per tonne for baking wheat. Today we have to wait and see whether the wheat price will rise again, or whether the bottom turns out to be €420.

Wheat doubled in price
Opinions between analysts and traders differ considerably. It is important to know that a clear split between the US and EU is noticeable. On the CME futures market in Chicago, the July contract closed Thursday at $12 a bushel, down from close to $12,80 earlier this week. A year ago it was $6 per bushel. Analysts therefore think that wheat has been overbought on both the CBoT and Matif, where a significant price difference is also noticeable.

The high price level is reflected in food inflation, which continues to rise. Poor countries in Africa and Asia in particular are feeling the consequences of this. Rice is normally 2 to 2,5 times the price of a bushel of wheat. Currently that ratio is 1,3. This makes countries more inclined to buy rice than wheat, analysts think.

At the same time, the demand for wheat is there – even at these price levels. It is not only dry and hot in India, this also applies to Pakistan and Bangladesh. Due to a disappointing local harvest, Pakistan may have to import double the amount of wheat (3 to 4 million tons instead of 1,5 million tons) this season.

Weather determines the price
The rally of the last two weeks has been built on concerns about growing conditions (heat and drought) and the news that India imposes an export ban. As usual, changing weather can cause prices to suddenly take a turn. That is also possible now. It is very dry and warm in the southern US states, but rain is expected before the end of this month. This could improve the poor crop condition – the worst in eight years.

In Europe too, the rally has largely been built on weather problems, especially drought and extreme heat for the time of year in France and Spain. This week there will be scattered thunderstorms with rain. The drought is worrying, but the problems are not yet disastrous. The 'bears' hope that the price can fall further. If enough significant rain falls, then this is certainly the case.

Export bottleneck
Russia is having a good growing season this year. In its latest estimate, the Russian market agency IKAR speaks of 85 million tons of grain, of which 39 million tons can be exported. In a normal season, such a message has a major impact on the wheat price. Because it is not certain how much Russia can export, things are more nuanced this season. The problems for Ukraine are even greater. Apart from a halved harvest, the export apparatus is also the major bottleneck there.

Historically, the wheat price peaks in mid-May (week 19/20) and the price level then weakens until the harvest in July. The weather in the Northern Hemisphere is the most important influencing factor. If there is sufficient precipitation between mid-May and July, the price can drop considerably. If the yields turn out to be better than expected, the price will generally recover at the beginning of August.

€500 wheat?
Whether this law also applies this year remains to be seen. Historical data does not take into account war or a sudden export ban. This is especially important for Europe at the moment. It is quite possible that the American price will fall faster than that in the EU if yields improve there. If grain exports in the Black Sea region to Russia and Ukraine continue to be hampered in the coming months, this will result in a high floor being set in the market, rain or shine. If growing conditions are disappointing, this 'perfect storm' can push prices up to €500 per tonne.