Analysis & Comment

Opinion | The Great Wheat Price Surge That Sputtered

Two of the world’s biggest wheat exporters are at war, and Russia recently redoubled its efforts to prevent exports of wheat from Ukraine, which it invaded in February 2022. Yet the price of wheat is lower now than it was before the war.

Let that sink in. Some Ukrainian wheat farmers have gone off to fight, and others are planting and harvesting under attack. Russia, the world’s biggest wheat exporter, has become a global pariah. Last month it withdrew from an agreement to allow Ukrainian grain to be exported through the Black Sea. And last week Russia used drones to attack granaries and warehouses along the Danube River that Ukraine uses to export wheat.

Amid all this, the latest settlement price of wheat on the Chicago Board of Trade is $6.13 per bushel (60 pounds) as of Friday, compared with $7.58 a bushel at the start of 2022, before war talk heated up. (Those are prices for the futures contracts closest to delivery at any given time.)

True, wheat prices rose on Friday, but that was because of expectations that India, which has been exporting wheat, will soon need to import it, Dan Basse, the president of AgResource Co. of Chicago, told me. The price rise had nothing to do with the war in Ukraine, he said.

I want to focus on the role of speculators in the rise and fall of wheat prices, because it’s both controversial and economically interesting. Jayati Ghosh, an economist at the University of Massachusetts, Amherst, wrote in an Aug. 11 article for Project Syndicate that blaming the 2022 price spike on Russia’s invasion of Ukraine is a “red herring.”

“So, what caused the surge in wheat prices?” she asked. “To answer this question, we must follow the money.” She observed that the four biggest global grain traders enjoyed big gains in revenue and profit in 2022. And she wrote that financial traders, including hedge funds, made big bets on rising wheat prices in the futures markets that spring.

In an interview, Ghosh told me the high prices in the spring of 2022 had “terrible consequences for the rest of the world — lots of very poor people being forced to import wheat at a very high price.”

Ghosh isn’t the first person to blame speculation. In May 2022 the nonprofit investigative newsroom Lighthouse Reports published an article titled “The Hunger Profiteers,” which said, “As millions more people face hunger across the world, speculators have flooded commodity markets in attempts to make a profit out of escalating prices.”

I share Ghosh’s concern for the impact of high wheat prices on the poor, but the story is more complicated than greedy speculators versus needy consumers. For one thing, consider this statistic: While speculators were betting on higher wheat prices in the spring of 2022, they’re betting on lower prices now. Managed funds have had a net short position in wheat futures contracts since July 2022, according to data compiled by the Commodity Futures Trading Commission. That undermines the narrative that they invariably root for higher prices.

Ghosh told me that there was no justification for prices to spike in the spring of 2022 because the market was well supplied with wheat. It’s true that there was no shortage at that moment. But a lot of people — not just speculators — were worried that serious shortages might soon occur. Marine insurers might have refused to insure ships transporting grain in the Black Sea. There seemed to be a chance that Russia’s wheat exports would be cut off. And President Vladimir Putin of Russia was threatening to use nuclear weapons, which would have thrown the whole world into turmoil.

“In a situation of extraordinary uncertainty, the first major war on the European land mass in 80 years, it’s not at all surprising that prices spiked to very high levels as the market attempted to sort out what the implications would be,” Scott Irwin, an agricultural economist at the University of Illinois, Urbana-Champaign, told me.

Prices settled down when it became clear that Russia had bumper wheat crops that it would be allowed to keep exporting and when the initiative permitting Ukraine to export grain through the Black Sea was signed.

Speculators play a useful role in markets, Seth Meyer, the chief economist of the U.S. Department of Agriculture, told me. “The market is trying to deal with risk, ration supplies. Speculation provides a market signal: If prices rise, produce more,” he said.

Also, speculators don’t automatically reap profits by buying commodities as prices rise. If the bubble bursts, they can be caught having to sell low what they bought high. It’s a risky business. “At the end of the day, the fundamentals always win out,” Joseph Glauber, a former chief economist of the U.S.D.A. who is now a senior research fellow at the International Food Policy Research Institute, told me.

I don’t want to let the big grain traders off the hook entirely. They do constitute an oligopoly, and they do more than arrange trades. They store, ship and process grains. The big four dominate the world market and are known informally as the ABCD group, after the first letters in their names: Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus. (I contacted all four companies, but none agreed to talk.)

Ghosh argued that smart traders whipped up war fears, drove up wheat prices and then dumped their positions at a profit on the dumb money, retail investors, thus harming both those investors and consumers. She also blamed the news media for amping up the dire warnings of shortages, which she said played into the hands of speculators.

That seems a bit extreme. I think it’s fair to say that it wasn’t just journalists who were worried about the impact of the war on grain prices in February and March of last year. I also don’t think speculators can inflate a price bubble by a meaningful amount for an economically meaningful length of time. “Can a high-frequency trader hit the market for 50 milliseconds and move it away from fundamental value? Yes, but these are tiny, tiny price changes,” Irwin said.

In contrast, Ghosh’s concern that the ABCD companies can get an edge in buying and trading by using their deep market knowledge strikes me as legitimate. Spinning a story that will make you money based on what you own is standard operating procedure in the commodity markets, Meyer said. “People talk their book all the time.”

The U.S.D.A. publishes extensive market data in part to even the playing field, taking away the edge of those big players by giving people the information they need to buy and sell at fair prices. That makes talking your book less effective, and it’s the kind of solution that appeals to a lot of economists.

Outlook: Aichi Amemiya and Jeremy Schwartz

This Thursday through Saturday, the financial markets will be looking toward Wyoming, where central bankers will gather for the annual Jackson Hole Economic Policy Symposium. This year’s theme is “structural shifts in the global economy.”

The theme could allow Fed officials, including its chair, Jerome Powell, to delve into “deglobalization, structural shifts in inflation and, perhaps most interestingly, the possibility of higher neutral rates,” Aichi Amemiya and Jeremy Schwartz, research analysts at Nomura, wrote in a client note on Friday. They said that a lot of policymakers probably disagree with John Williams, the president of the Federal Reserve Bank of New York, who argued in an interview with The Times that the neutral interest rate — which neither stimulates nor retards growth — is as low now as before the pandemic.

Quote of the Day

“Men who have created new fruits in the world cannot create a system whereby their fruits may be eaten. And the failure hangs over the state like a great sorrow. … And in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.”

— John Steinbeck, “The Grapes of Wrath” (1939)

Peter Coy has covered business for more than 40 years. Email him at [email protected] or follow him on Twitter. @petercoy

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