What the Higher Wheat Prices Mean for Your Portfolio
And how you can hedge against it.
Beginning of February 2022, the bushel of wheat cost approximately $7.50.
The bushel is the unit used in the USA to measure the price of crops. It is the equivalent of roughly 25.4kg.
In Europe, crops prices are measured by the ton.
Since August 2021, the evolution of the price of wheat went as follows.
Between January 2022 and March 2022, wheat prices rose up to 70%, mostly fueled by the fear about the level of global wheat supplies.
It has seen stabilized, but further swings are expected.
In this article, we will have a look at worldwide wheat production, the impact on the economy, and how investors can invest in the right assets to hedge against it.
The Worldwide Wheat Market
Wheat is a grass grown for its seed used as the basis for food products worldwide.
The world produces roughly 750 million tons of wheat each year.
Wheat is subsequently transformed into flour used as the basis for bread, biscuits, pancakes, pastries, pasta, pizza, and breakfast cereals.
It is the second most grown crop on the planet, after corn.
Who Produces and Exports the Most Wheat?
China is the biggest producer of wheat, followed by India, and Russia.
However, most of China’s and India’s production is reserved for domestic consumption.
- China: 134.3 million metric tons
- India: 98.5 million metric tons
- Russia: 85.9 million metric tons
- United States: 47.3 million metric tons
- France: 36.9 million metric tons
- Australia: 31.8 million metric tons
- Canada: 30 million metric tons
- Pakistan: 26.7 million metric tons
- Ukraine: 26.2 million metric tons
- Germany: 24.5 million metric tons
The biggest exporters of wheat are:
- Russia: 37.2 million metric tons
- USA: 26.1 million metric tons
- Canada: 26.1 million metric tons
- France: 19.7 million metric tons
- Ukraine: 18 million metric tons
- Australia: 10.4 million metric tons
- Argentina: 10.1 million metric tons
- Germany: 9.2 million metric tons
- Kazakhstan: 5.1 million metric tons
- Poland: 4.6 million metric tons
Who Imports the Most Wheat?
Roughly 170 million tons of wheat are imported each year.
This accounts for 22% of worldwide production.
- Egypt: 12.8 million metric tons
- Turkey: 11 million metric tons
- Indonesia: 10.5 million metric tons
- Algeria: 7.1 million metric tons
- Brazil: 7 million metric tons
- Philippines: 7 million metric tons
- Bangladesh: 6.8 million metric tons
- Japan: 5.6 million metric tons
- Nigeria: 5.3 million metric tons
- Mexico: 5 million metric tons
Why Are Wheat Prices Up?
Three reasons explain why the price went up so fast.
1. Supply and demand
Russia and Ukraine produce 15% of worldwide wheat, but together account for roughly 1/3 of total exports.
On Monday 14th of March, following the sanctions that prevented it to access its reserves of foreign currencies, Russia declared it would temporarily suspend exports of wheat to ex-Soviet republics.
The reason is that the country may not hold enough currencies to import food from abroad and may wish to keep its wheat supply for domestic consumption; or for buyers willing to pay them in US dollars or euros.
On the Ukrainian side, experts estimate that Ukraine’s wheat production could be cut in half, if not more.
In order for the trade to be ongoing, ports need to be opened, supply chains need to run and farmers should be in their fields growing crops. None of this is happening at the moment.
Russia is a major producer of potash and phosphate, and produces roughly 13% of the total volume of fertilizers worldwide.
These fertilizers are used to grow crops everywhere on the planet.
Because of the current economic sanctions, Russia may not access the material it needs to produce these fertilizers, or may simply decide to limit its exportation.
The third problem concerns the general inflation in energy and raw materials. Russia, yet again, is an important gas, oil, and raw material producer.
Now that it is isolated from a huge part of the worldwide economy, producers in other countries will have to increase their production for the prices to decrease.
So far, Saudi Arabia and the Emirates, two important energy producers, have signaled that they weren’t willing to increase production.
What Will Be the Impact of Higher Wheat Prices?
The impacts are of two orders: social and economic.
Inflation is a frequent cause of protests and social movements in developing countries, like Egypt in 2017, Jordan in 2018, or Kazakhstan in 2022.
As a result, we may expect social movements in poor regions, a frequent catalyst for instability.
From an economic point of view, households spend the bulk of their budget on food, rent, and transport.
Higher food prices mean that they will have to allocate a bigger share of their budget to food, hence decreasing consumption of other goods and services (entertainment, clothing, etc).
As a result, we can expect them to decrease their spending in other sectors, which may slow down the economy overall.
In case of an economic slowdown, companies will have to slash their forecast, and the stock market value may decrease.
How Can Investors Protect Their Portfolio?
Farmland is the ideal asset for investors that desire to protect their portfolios, for two reasons:
- Current inflation
- The lower level of food production
Farmland’s value is directly correlated to the asset it produces.
In our case, a decrease in crop output means that we can expect a sharp rise in farmland value in the upcoming months.
Furthermore, farmland’s value is generally correlated with inflation, which means it is an ideal asset investors can use to protect their purchasing power.
With LandEx, investors can invest directly in farmland without going through all of the hurdles of owning it.
Disclaimer: this article should not be considered financial advice.
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