Structural changes in the global grain markets

The transformation of the global grain market

While shifts in the global wheat production have occurred with a certain frequency, these have been relatively small. The major and more significant changes are happening in trade dynamics.

The starker swings we’ve been witnessing in the wheat trade are due to the following factors:

1. Global wheat supply and trade have changed, causing a structural shift in the global grains market.

2. Residual issues from Covid, increasing risk from severe weather, ongoing domestic and geopolitical decisions, growing pressure on supply for biofuels, and the broader shift to a low-carbon economy promise to make volatility normal.

3. The acute impacts of Russia’s invasion of Ukraine will further internationalize the market, essentially creating a market of markets.

The impact of increasing Black Sea exports

There has been an 8.7% increase in exports from the Black Sea with a corresponding 10% reduction in exports from the US. This has transformed the market, placing far more emphasis (and now acute risk) on Black Sea exports.

Individual markets are still experiencing volatility in exports and price dynamics

Beyond the broad shift, individual markets continue to be heavily impacted by Covid-induced logistics disruptions, unseasonal and increasing severe weather events, and domestic and geopolitics that affect export volumes and price dynamics.

Volatility has become normal; accentuated by the Russian invasion of Ukraine.

The spread between global benchmarks and local price trends presents a high financial risk for traders

Global methods to manage risk and highlight price direction, such as using CME futures, can only partially capture local dynamics. This exposes traders to unnecessary and avoidable ‘basis’ risk if the global price does not reflect local market realities.

The spread between regional prices and the global benchmark creates financial risk.

From January 2021 to today, the monetary value of the spreads (or the accrued inefficiency) for wheat prices are between $303M (Wheat FOB Germany 12.5% wheat) and $2.8B (Wheat FOB W Australia APW).

The global grains marketplace has changed and is now faced with new global dynamics, acute pressure from the Russian invasion of Ukraine, volatile and elevated prices, and growing demand for biofuels that create additional pressures on global supplies.

Planners, traders, and buyers need to be grounded in the new market and anchored to market reflective prices that give the best insights to navigate a turbulent, transformed marketplace. They need new price assessment methods that account for a more internationalized, volatile market.

To gain better insights into current and expected market dynamics, join our free webinar on June 1, 2022.

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