Grain Price Relief, not Reversal
Bottom line: Grain prices have come off noticeably in recent weeks, which should provide near-term relief for food price inflation in CPI baskets and remove some concerns for central bankers. However, U.S. recessions do not appear to depress global food prices. Additionally, stock levels of corn and soybeans outside China remain below average, which can structurally underpin corn and soybean prices. Wheat price speculators have also now been largely washed out and wheat prices should start to find support. Thus near-term relief in CPI food price inflation may be modest and not long-lasting.
Figure 1: Grains Prices (Jun 2005 = 100)
Source: Datastream, Continuum Economics
Grain Price Relief
Grain prices have fallen in recent weeks (Figure 1), as concerns about a U.S. recession have caused a change in sentiment in commodity markets, with a decline in oil and copper prices also being evident. The net speculative long position in SRW Wheat, for example, has been cut dramatically (Figure 2), as hedge funds and other speculators have banked profits in a volatile financial market environment.
Figure 2: Net Speculative Position Chicago SRW Wheat
Source: Bloomberg
However, it is not clear that a U.S. recession will cause a long-lasting downturn in wheat and grain prices, as demand for food is likely to be more resilient in a U.S. recession than demand for durables or consumer services. Indeed, looking at the last four U.S. recessions (Figure 3), the FAO food price change has not been significantly impacted by a U.S. recession, except the one that started in December 2007. During the early stages of the GFC, the food price index actually rose through H1 2008, as supply conditions remained constrained in the agriculture sector, and only into late 2008 did the index reverse. In the current slowdown, some surveys have suggested that low-income groups are curtailing food expenditure (e.g., the UK), which perhaps reflects the shock from very high current inflation. However, at a global level, this is unlikely to be enough to dent food consumption, as India and China are not forecast to enter recession.
Figure 3: FAO Food Price Change during U.S. Recession Periods (100 = 6 months before start of U.S. recession)
Source: FAO, Continuum Economics. Zero is the start date of U.S. recession
For H2 2022, what is more important is the global demand/supply balance for grains. Certainly the war in Ukraine will have a noticeable impact on wheat production, with the International Grain Council estimating 19m tons in 2022-23 vs. 33m tons in 2021-22. However, recent estimates suggest that this will be counterbalanced by better-than-expected production in Canada and Russia. Additionally, corn and rice can provide alternative sources for a changed diet, and part of the recent decline in grain prices has also been due to forecasts of record rice production and healthy corn production in the U.S.
Figure 4: International Grain Council Production and Consumption of Grains
Source: International Grains Council
Figure 4 shows that the world picture is of consumption outstripping production and this leading to a modest decline in global grain stocks. However, we would feel that the recent decline in grain prices may not last for a number of reasons.
- Fertilizer could dent production. While the 2022/23 production estimates are currently good (Figure 4), much uncertainty exists about sky-high fertilizer prices causing less usage of fertilizers and then less production of grains for 2022/23.
- Stocks outside of China low. The world grain stocks look reasonable, but excluding China the figures are less comfortable. Corn and soybean stocks outside of China remain low by historical averages, though wheat and rice are better. This means that any major weather-related disruption could cause a renewed surge in corn and soybean prices.
- Ukraine Black Sea exports doubtful. Hopes around Turkey/UN/Russia/Ukraine July talks on safe passage for Ukraine wheat through the Black Sea have also been a factor behind the profit-taking on long wheat positions — though less important than profit-taking on U.S. recession fears and the overall grain demand/supply picture becoming less bullish. However, we remain skeptical that Russia will agree to large-scale exports of Ukrainian wheat, as Russia seeks to consolidate its existing gains but also still destabilize the Ukraine government. We do not foresee a peace deal and feel that exports from Ukraine will be restrained. This could put a floor under wheat prices and mean renewed gains at some stage as talks fail to make progress.
Overall, we would still see scope for grain prices to consolidate and actually increase later in the year. Additionally, food prices in CPI baskets are also a function of production and distribution, where costs are being elevated by energy prices and labor shortages. Thus near-term relief in CPI food price inflation may be modest and not long-lasting.
I,Mike Gallagher, the Director of Research declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.