Tighter US supply combined with blocked exports from the Black Sea boosted food prices and corn and wheat futures hit new highs in more than three years

The Zhitong Finance App learned that corn and wheat futures have both recently risen to a high level of more than three years, but the factors driving the rise of the two agricultural products are clearly different. Deteriorating US corn supply prospects, European production cuts, and strong global demand are all driving up corn prices, while the rise in wheat is mainly driven by the escalation of the Russian-Ukrainian situation, blockage of food exports from the Black Sea, and extreme weather shocks to supply in Europe and the US. As fundamentals tighten and superposition trading capital enters the market, the upward momentum for prices of the two agricultural products has further increased.

On Friday, wheat futures closed up 3.1% to 784 cents per bushel, hitting an intraday high of 790.25 cents, the highest level since February 14, 2023. The cumulative increase this week was 12.1%, the biggest weekly increase since March 2022; the cumulative increase since this year has exceeded 54.5%.

Corn futures rose 0.6% on Friday to close at 536.5 cents per bushel, rising to an intraday high of 541.25 cents, also the highest level since July 2023. Corn has risen 5.5% this week, and has risen 15.6% since August, which is expected to be the best monthly performance since April 2021; the cumulative increase since this year is 21.8%.

Deteriorating US supply expectations drive corn up

Unlike wheat, which is mainly driven by geopolitical factors, the core reason for the current rise in corn comes from the continued decline in US domestic supply expectations.

William Osnato, head of commodity data research and analysis at Barchart, said that since the beginning of August, the market has gradually formed a consensus that the actual supply of corn in the US may be lower than expected at the beginning of the month.

The latest August Global Agricultural Supply and Demand Forecast Report (WASDE) released by the US Department of Agriculture (USDA) further strengthened this concern. Although total corn production in the US is still expected to reach the second-highest level in history this year, the USDA lowered the yield forecast by 2.3 bushels/acre to 180.7 bushels/acre, a decline exceeding traders' previous expectations.

At the same time, the field survey results obtained by the Pro Farmer crop inspection also fell short of expectations. Many corn growing regions in the US experienced excessive rainfall in June, followed by extreme heat in July, affecting crop growth.

Although the most critical growth period from the end of July to the beginning of August has now been slightly missed, Osnato notes that bad weather may further affect final production. During August, parts of the corn belt in the eastern United States once again experienced excessive rainfall, and fungal diseases also occurred in the late stages of corn growth.

Jim McCormick, co-founder and chief operating officer of AGMarket.net, said that previously, the global market had hoped for a good harvest in the US to ease supply constraints, but as America's own production prospects began to become uncertain, the market is entering a “allocation model” to suppress demand through price increases.

European droughts and Ukrainian export restrictions further tighten corn supply

Outside of the US, continued high temperatures and droughts in Europe have also had an obvious impact on local corn production, while strong European import demand has further increased global supply pressure. The USDA raised the US corn export forecast by 75 million bushels to 3.3 billion bushels, reflecting the impact of increased global demand and restrictions on Ukrainian exports.

Ukraine is one of the world's leading corn exporters. However, Osnato pointed out that compared to wheat, the marginal impact of Ukrainian export disruptions on corn prices was relatively limited because some of the risks had previously been measured by the market.

McCormick, on the other hand, believes that European corn production cuts may also indirectly affect the wheat market. As less corn can be used for animal feed, Europe is likely to increase the amount of wheat used as feed and reduce wheat exports, thereby further tightening the global supply of wheat.

The blockage of exports to the Black Sea has become the core driver of the sharp rise in wheat

In contrast, the current rise in wheat is more closely related to the direct impact on the global supply chain.

As the tension between Russia and Ukraine in the Black Sea region escalated, grain exports were disrupted, causing the market to worry about global wheat supply. Russia and Ukraine together account for more than a quarter of global wheat exports, so any significant decline in Black Sea shipping capacity could quickly affect international market prices.

Osnato said that a series of recent supply disruptions in the Black Sea region are the “main story” driving the rise in wheat.

Russia is the world's largest exporter of wheat, and is also an important source of low-cost supply in the international market. Its export prices often have an important impact on global wheat prices. Recently, however, the amount of wheat transported by Russia through the Black Sea has declined markedly.

Recent attacks have occurred in the Sea of Azov, and food export facilities, oil tankers, and other ships in the Black Sea region have also been affected by military operations, which not only destroyed some export capacity, but also made it more difficult for shipping companies to obtain insurance.

According to Osnato, what is really driving changes in market prices is a change in investors' expectations for future supply. Due to the obvious damage to the Black Sea's grain transportation capacity, the market anticipates that Russia may export millions of tons less wheat in the near future.

Extreme weather further intensifies pressure on global wheat supply

In addition to the situation in the Black Sea, extreme weather is further tightening the supply of wheat.

Osnato said the severe heatwave reduced European wheat production by about 8 million to 10 million tons. Meanwhile, the US states of Texas, Oklahoma, and Kansas experienced droughts, which also led to a decline in hard red winter wheat production.

This means that the global wheat market is facing both geopolitical and weather supply pressures at the same time. The risk of Black Sea exports caused by the Russian-Ukrainian conflict has received particular market attention. As Russia and Ukraine occupy an important position in the global wheat trade, the supply of wheat available to the international market may decline further if export infrastructure continues to be damaged or shipping insurance costs continue to rise.

Years of new highs attract trending capital to enter the market

In addition to tightening the supply of fundamentals, corn and wheat have themselves begun to attract new trading capital by breaking through multi-year highs.

Osnato pointed out that when futures contracts break through new or multi-year highs, momentum trading and systematic trading strategies usually begin to focus on the relevant market. This means that the current agricultural products market is not only driven by the fundamentals of supply and demand, but is also beginning to receive support from trend trading funds.