Agriculture & Food

Affected by extreme weather, wheat production in the two major exporters of Russia and Canada has fallen, causing prices to reach their highest points in many years. This has pushed up the price of bread, a major food item, and put tremendous pressure on many overseas families and importers.

01. The two major exporting countries have reduced wheat production

Wheat grows more globally than any other crop, and it is used to make basic foods such as bread, pasta and breakfast cereals.

In July, drought and high temperatures reduced Canadian wheat production. A few months ago, Russian wheat had just been hit by a severe winter. As the two largest wheat exporters in the world, their reduced production has pushed up food prices to multi-year highs, intensifying people's worries about rising food prices in countries with weak food production.

This week the U.S. Department of Agriculture lowered its forecasts for Canadian and Russian output, and wheat futures rose sharply. Reduced crop production in the United States has also increased upward pressure on food prices. Paris wheat futures prices also rose 9.5% this week, reaching their highest level since 2012.

The wheat export price index calculated by the International Grain Council has risen by 46% year-on-year this year. In addition, the UN's global agricultural product price index is also close to a 10-year high.

In the United States and other countries, following labor shortages and transportation and logistics problems, the increase in bread prices caused by wheat will be another pressure on the food supply chain. From the government level to ordinary families and individuals, they will be affected, especially poor countries that rely on imports.

It is worth noting that at this time the granaries in the northern hemisphere are usually fully stocked due to the arrival of the new harvest season, so the rise in wheat prices to multi-year highs is anti-seasonal.

The US government predicts that global food reserves may fall to the lowest point in five years, and the supply of exporting countries is particularly tight.

According to Bloomberg, Carlos Mera, head of agricultural market research at Rabobank in London, said that the market is facing a global food deficit. This exacerbates people's concerns about food inflation, because wheat is an essential food.

02. Importers face price shocks

From French baguettes to Middle Eastern flat breads to Asian noodles, the price of wheat has a more direct impact on consumers than crops such as corn and soybeans, because corn and soybeans are mainly used for animal feeding. The continued shortage of supplies means that food prices may continue to rise until the southern hemisphere's food harvests in early 2022 may ease the pressure.

In the past few years, Russia has been the mainstay of global wheat exports and is usually the largest single exporter. At the same time as the reduction in food production this year, the Russian government is also imposing taxes on export goods to curb the rise in domestic food prices. This may cause many countries to switch to imports of wheat from countries such as the European Union and Ukraine.

According to data from the US Department of Agriculture, the EU's wheat production this year is even more, from 125.9 million tons to 138.6 million tons, but heavy rains in France and Germany also hindered the harvest to a certain extent.

In order to prevent food shortages, many countries will carry out food reserves, because food shortages are often a precursor to social instability. However, as food prices soar, the budgetary cost of importers will be affected. The cost of transporting grains around the world is also soaring. For poorer, import-dependent countries that have been hit by the new crown epidemic, the blow is particularly severe.

The U.S. Department of Agriculture this week also lowered its forecasts for wheat imports in North Africa, Southeast Asia and Afghanistan in 2021-2022. Africa and Asia have the highest share of food imports in the world. The President of Egypt recently called for an increase in the price of bread subsidized to citizens, thereby promoting a reduction in government spending. At the same time, because importers are facing price shocks, the purchase of food crops in many countries such as Turkey and Jordan will either be cancelled or the purchase volume will be lower than expected.

According to a Bloomberg report, Abdolreza Abbassian, an economist at the Food and Agriculture Organization of the United Nations, said: I am afraid I can't see any signs of (inflation) ease. Unfortunately, too many factors are pushing up domestic inflation in many parts of the world.

There are risks in the market, and investment needs to be cautious.