This Summer Could Be a Scorcher, Lifting Wheat Prices
Expectations of an unusually hot and dry summer, combined with the impact of the war in Ukraine, will probably send wheat prices surging by about 20% from current levels as early as April, experts say.
“Drought will return and hurt spring wheat, not only in the U.S. but also in other places,” says Shawn Hackett, president of Hackett Financial Advisors in Boca Raton, Fla. That, in turn, could lift prices.
Risk-tolerant traders should consider buying September-dated futures contracts for hard red spring wheat on the Minneapolis Grain Exchange. Alternatively, traders might consider buying the Teucrium Wheat (ticker: WEAT) exchange-traded fund, which tracks a basket of wheat futures. It tracks a different type of wheat, but the two typically move together.
Savvy investors may wish to wait a few weeks before executing any trades. Hackett sees the wheat market slumping into April and then forming a bottom from which prices will bounce into a significant rally.
The past year has seen hard red spring wheat prices drop from highs around $9.40 a bushel to $8.28 recently, as concerns about supply disruption due to the Russia-Ukraine war dissipated. However, the weather this year could reverse much of the price drop.
“There are numerous reasons to suggest that 2023 will prove to be very hot in the core grain belt,” states a recent report from Hackett. The note cites two major factors that will probably produce a scorching summer: the current “grand solar minimum,” which means the count of spots on the sun’s surface dropped to historically low levels, and the Tonga undersea volcano eruption in January 2022, which catapulted 45 million metric tons of water vapor into the stratosphere.
Russia and Ukraine, respectively the top wheat exporter and the sixth largest, are unlikely to contribute as much grain as usual this year, says Sal Gilbertie, CEO of ETF company Teucrium. “At some point, Ukraine will run out,” he says. That’s due to a lack of farmworkers who are now needed to fight the Russian army—a shortage likely to cut the crop volume by 25%, experts say. Adding to the problem are delays in shipping the grain through the Back Sea and Bosporus, the result of Russia’s demands to check the cargo.
And Russia has farm problems of its own. Notably, there’s a lack of labor due to the mass military conscription, as well as a shortage of spare parts for agricultural vehicles because of the sanctions on the Kremlin. That means sowing or harvesting the crop will be tricky. There may even be problems in planting the spring crop, says Gilbertie. “Even if the growing season is good, they may not have room for the new crop,” he says, meaning that last year’s crop might need to be removed.
Relatively low wheat inventory will exacerbate the effects of the weather and the war. At the start of the 2022-23 season, global wheat inventories totaled 271 million metric tons, which represented just 34% of projected consumption, according to data from the U.S. Department of Agriculture. That’s down from 39% for the 2018-19 season. Such low stockpile levels will probably make price movements more volatile.
Not everyone is worried about this summer’s weather. “The weather will be better this year than the past few,” says Joe D’Aleo, a meteorologist at forecasting company Weatherbell. “Kansas is the big concern, but all of the forecasts say it should be wet in Kansas this summer.” In turn, that should mean a larger crop than seen recently.
This trade has some risks. Getting the timing accurate when making weather forecasts is tricky, and predicting how geopolitical tensions will flare up might be even harder. Still, given the overall situation in the wheat market, the suggested trade could well work out.