War & Weather | Agricultural Global Markets in a Vise
Russia’s war of aggression in Ukraine has profoundly accelerated the dramatic spike in wheat – classified as a strategic grain – and other agricultural prices due to Russia’s blockade of exports with resultant shortages in the world market.
Doubling Down on Teucrium Wheat Fund (NYSEARCA:WEAT)
Teucrium Wheat Fund (WEAT), which is based on wheat futures, has traded within a relatively narrow range the past 30 days, between $10.32-$11.00, and I believe is poised for a strong upward breakout as the Russian campaign continues in Ukraine and the Indian government’s ban on wheat exports as an accelerant.
The popularity and high demand for this fund was articulated in the New York Times article entitled A Market Mystery: The ‘Wheat Whale’ That Came Out of Nowhere, published on April 8, 2022.
For your reference, the following is performance of WEAT that corresponds to the publishing dates of my SA articles as a strong buy:
For the past month, despite the increase in war hostilities and halted exports from Ukraine, WEAT initially traded a $7.66 just before the Russian invasion and then jumped but remained within a narrow range, closing at $10.91 on April 14 and $11.64 on May 13.
With respect to Ukraine, the wheat planting and harvesting season are practically lost because of the on-going war, particularly in the wheat producing area where hostilities are currently most intense. The following chart, entitled Ukraine: Wheat Production, provided by the Foreign Agricultural Service, US Department of Agriculture, provides a superb visual of Ukraine’s wheat producing region located in and around present-day hostilities.
For those investors who seek to view corresponding maps from the aforementioned data source for other Ukrainian agricultural products, specifically corn, barley, sunflower seed, and soybeans, one can access them in my SA article entitled Agricultural Super Cycle on Steroids, published on March 9, 2022.
For this reason, wheat exports have been blocked since the war’s outbreak in late February 2022.
Although draconian sanctions have been imposed on Russia, the West has “carved out” exceptions by allowing the export of Russian food and fertilizer. The problem is that restrictions on financial transactions with Russia have delayed, and sometimes prevented altogether, export shipments and delivery, as importing countries try creative ways to do a legal work around.
The criticality of agricultural exports from Ukraine and Russia is articulated in the following chart entitled Why the War in Ukraine Threatens Global Food Security, as provided by the Food and Agricultural Organization of the United Nations.
Alternative Sources: Wheat Shortfalls
Countries heavily dependent on Ukraine and Russia for their wheat supplies are in a tight spot because of severe shortages elsewhere, whether in inventory or harvest projections, because of weather. Other large wheat producers are encountering difficult weather-related problems, deleteriously impacting wheat production, and consequently are unable to provide surplus wheat to countries heavily dependent on Ukraine and Russia exports.
India’s March heat wave was one of the hottest in their history. According to government sources, they estimate that the heat wave may have damaged upwards of an estimated 25% of their wheat crop. For this reason, the Indian government banned wheat exports. This extreme protectionist policy eliminates wheat exports as a stop-gap relief for many import-dependent and poor countries that would have received exports from Ukraine and/or Russia.
Because India is the world’s second-largest wheat producer, this removes a considerable amount of additional wheat from the world market. For this reason, wheat and other agricultural foodstuffs may no longer be considered fungible and could wreak havoc in the global markets.
Furthermore, as a major wheat producer, India has set a precedent in banning the export of a strategic agricultural commodity caused by weather-related circumstances. Because of India’s huge market share, this could trigger a protectionist domino effect for all other wheat and agricultural exporters.
France is the EU’s largest wheat exporter and was also counted upon to supplement the shortfall in Russian and Ukrainian wheat exports. Because France’s agricultural sector faces near-drought conditions, a normal wheat crop yield is in doubt.
U.S.A: Many agricultural states are suffering droughts especially California, notably in Central Valley, the agricultural heartland. California produces 33% of the nation’s vegetables and 67% of the fruits and nuts. Canada is also experiencing drought-like conditions in the agricultural regions.
China is the one of the world’s largest producers and consumers of wheat. Winter wheat is to be harvested in June however the crop yield is uncertain due to drought and flooding occurrences during the planting and harvesting season.
To make up for any domestic consumption shortfall, China has the world’s largest foreign currency reserves and can push up world market prices by crowding out and outbidding poorer countries for the import of agricultural foodstuffs.
Global Wheat Inventory Quality & Realpolitik
Globally government agencies announced that they have sufficient food inventories to weather the shortages, or at least buy time to secure additional foodstuffs. Understandably, governments may not be forthright with their inventory figures in order to avoid public panic and civil unrest.
What governments may not know is the quality of those storage facilities. Degraded food inventory may be unfit for human consumption but can be used as animal feed. If this is the case, once again governments may resort to mixing the good with questionable quality foodstuffs to avoid civil unrest.
The Super Cycle Ride
During the aforementioned 30-day period, I believe that, despite the meteoric rise in wheat prices, the market repeatedly failed to fully factor in the ominous geopolitical realities and global collapse of climate-related agricultural production.
This trend has been supported by a plethora of highly credible private industry and governmental data, including public statements by their respective leadership, and even anecdotal information by farmers themselves that preceded the official governmental and private industry reports.
During a crisis, the movement of agricultural commodity prices often are unpredictable, like a feral beast that doesn’t initially hew to the fundamentals. In this uncertain environment of war and weather, agricultural commodity prices will experience violent and swift vicissitudes and may even dramatically either undershoot or overshoot the fundamentals.
The cascade of events along the agricultural farm-to-table supply chain has impacted every node along the way, compounding the crisis.
For the aforementioned reasons, I recommended a strong buy for WEAT and forecast an $18 per share price by late spring.