The worst drought in 130 years has destroyed at least a fifth of the current Russian wheat crop and threatens much bigger damage to the winter wheat crop if the weather doesn’t change soon. Only a bumper crop in the U.S. has prevented wheat prices from really going through the roof.
Russia is generally the fourth largest wheat producer in the world. Along with the former USSR member states of the Ukraine and Kazakhstan, it would be a close second to top producer China. Unfortunately, the Ukraine and Kazakhstan are also affected by drought. Ironically, the world’s second largest wheat exporter, Canada, had the opposite problem of excessive rains this year and the wheat crop there is expected to be 35% below normal.
Investors shouldn’t confuse production and exports for food commodities.
China and India are usually the two largest producers of wheat, but because of their huge populations, they can also be importers as well. It is the United States, the third largest producer, that is the biggest exporter of wheat and it generally accounts for 20% to 30% of the global total.
The U.S., Canada, Australia, the EU-27 and Russia-Ukraine-Kazakhstan together usually supply around 90% of the wheat to the export market. France is the major source of wheat from the EU, with Germany being a distant second. Expect major wheat importing regions- North Africa and the Middle East, East and South Asia, and South America – to feel any production shortfall.
The USDA had projected a billion bushel surplus from this year’s U.S. wheat harvest. Without this, global supplies would be severely strained. Nevertheless, wheat is rallying strongly with prices at the Chicago Board of Trade up 42 percent in July, the biggest monthly rally in 50 years. Wheat prices broke above $7 a bushel there on Tuesday.
At the Kansas City Board of Trade, hard red winter wheat prices were at a 13-month closing high of $6.85 a bushel. This is still a far cry from the all-time high of $13.84 a bushel in 2008 however.
ETFs or ETNs for U.S. investors that can be used to invest in wheat on the long side are the Swedish Export Credit Corporation ELEMENTS ETF (NYSEArca: GRU), which is linked to the MLCX Grains Index and has around 50% wheat exposure; the iPath Dow Jones UBS Grains Total Return Sub-Index ETN (NYSEArca: JJG) with around 30% wheat exposure; and PowerShares DB Agriculture Fund (NYSEArca: DBA), with 25% wheat exposure.
And in the U.K., WEAT and LWEA (200% leveraged) offer wheat exposure. Investors may wish to wait until there is a pullback though since wheat looks extremely overbought at the moment.
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