Wheat price forecast for 2021: will the market remain bullish on Russian export curbs?

Wheat prices have climbed since summer 2020 and spiked in the past month after Russia, the world’s largest exporter, announced export taxes on wheat and grain export quotas.

While reduced demand from restaurants, cafes and other hospitality venues during the Covid-19 pandemic has affected some agricultural commodities, the wheat market has been supported by long-term trends in population growth and animal feed use. The move by Russia to increase supply and reduce prices on its domestic market is set to remove oversupply on the international markets.

But what does that mean for commodity traders and investors? Is wheat a good investment in 2021? Read on to find out.

Wheat price forecast 2021

Global wheat market overview: choosing the grain as an investment vehicle in 2021

The global wheat market is one of the most actively traded commodity markets, as it ensures the international supply of one of the world’s staple grains. Wheat is primarily used to produce flour, and plays a role in the production of whiskey, beer and cooking oil.

The wheat market is also volatile, as the widespread consumption of wheat for food and the impact of weather conditions on production can drive large price changes. That makes it a profitable market for traders and investors looking to buy when fundamentals indicate the potential for price spikes.

Pricing on the wheat market is based on the marketing year, which varies in different regions depending on the start of the harvest season. For example, the marketing year begins on April 1 in Japan, July 1 in the European Union (EU) and New Zealand, August 1 in Canada and October 1 in Australia, according to the Organisation for Economic Co-operation and Development (OECD).

The international wheat market trades regional contracts based on main production hubs such as the Black Sea, UK and EU in Europe; Chicago, Minneapolis, and Kansas in the US; Australia in Asia-Pacific and Argentina in Latin America.

If you are new to investing in the wheat market, you might also be wondering what affects the price of wheat.

What drives wheat prices today?

Wheat prices have tended to trend higher over the past decade, as population growth in Africa and the rising middle class in China and India have driven up demand. The use of wheat in animal feed has also grown, particularly in Australia, where an ongoing drought and rising beef exports have increased the need to substitute grazing for cattle.

The wheat price forecast has historically moved in line with expectations for the Russian ruble, as the value of the currency affects the cost of exports from Russia. However, analysis from CME Group shows that stronger growth in China, a rise in energy prices and poor crop weather in the Black Sea region may have caused a recent divergence in the direction of the ruble and wheat prices.

Although wheat is not typically used as a biofuel, unlike corn, the market often moves with crude oil prices. And prices continue to track currencies of other wheat exporting nations such as Australia and Canada.

Tightening supply drives wheat price rally

The UK wheat market, available for trading at Capital.com, has been in an upward trend since August 2019, when it bottomed around £134 per tonne. The price reached the £154 level in August 2020 and has since accelerated faster, spiking above £200 in December when Russia announced its plans to introduce export taxes from February, increase them in March and continue them into the 2021/2022 trading year.

Helen Plant, the senior analyst at the Agriculture and Horticulture Development Board (AHDB) in the UK, said: “The goal of the taxes is to reduce domestic prices. Historical caps or taxes have been mainly in relation to small crops; this tax is also about the fallout of the coronavirus pandemic and recession. The new tax on wheat is high enough that it could limit exports of wheat from Russia this season.”

“IKAR, a Russian consultancy, reduced its forecast for Russian wheat exports by 1.0Mt to 37.5Mt. The USDA forecast exports at 39.0Mt. In addition, there are proposals to introduce a ‘floating’ tax from 1 July. If this is confirmed, next season’s trade could be impacted too.”

AHDB analyst Anthony Speight noted: “Globally we are forecast to have some of the highest global wheat ending stocks ever, but prices are still supported. This is due to continued demand for cereals and oilseeds combined with political intervention, on-going dryness in South America and the lowest US maize ending stocks since 2013/14. This has meant that the start of 2021 has continued to be as bullish as 2020 ended,”

Speight also added that “a rise in maize prices will likely push up global wheat markets.”

Will wheat prices go up 2021? What is the outlook for the market and should you consider investing in the commodity?

Wheat price forecast for 2021: will the rally continue or is tighter supply priced in?

According to the International Grains Council, “the first projections for world wheat supply and demand in 2021/22 point to record production and, despite higher consumption, a further accumulation of global stocks”.

“However, the build-up of stocks is again expected to be centred on China and India. An above-average level of trade is predicted, even if not as high as the record of the year before. Russia will potentially export less than in 2020/21, but could remain the largest exporter.”

The industry is in buying mode and the trade is keeping an eye on Russia for price direction, noted Jack Scoville, an analyst at Price Futures Group, in a recent commentary. The United States Department of Agriculture (USDA) has cut ending stocks and increased domestic feed demand to account for less than expected quarterly stocks, although rain and snow in the southern Great Plains region will be beneficial to crops. Australian supplies have increased as its harvest is moving to completion.

Oliver Sloup, an analyst at Blue Line Futures, said: “As with many of the grain markets, the chart has looked constructive and the path of least resistance has been higher since the first headline from Russia, December 9.”

Futures prices for UK wheat on the Intercontinental Exchange (ICE) indicate the market is set to remain above £200 per tonne out to July, then slip back to the £165 level by November.

Analysts at ABN Amro in their latest wheat price prediction expect US wheat prices to come off the highs during the summer but rise during the fourth quarter and into 2022: “Forecasts show that the wheat market is in oversupply this season, but this is less than one week of demand. Russia is considering an export tax, which translates in lower availability.”

“Besides this, stronger Chinese demand and low inventories will keep prices firm.”

Capital.com

Tags: wheat prices, UK, wheat market, Russia