Wheat prices have spiked over 10% over the past three months, driven by the disruption of grain shipments in Ukraine and the return of ‘La Nina’.
La Nina has caused drought conditions around the world to intensify for the past three years and is joining with Russia’s war in Ukraine to push prices higher. A rare three-years-in-a-row La Nina is hitting the US, the National Oceanic and Atmospheric Administration said recently.
The weather pattern “makes disruptions like [the Russian invasion] even more problematic,” Robert Minter, director of ETF investment strategy at abrdn, told ETF.com. “We have bad production after having bad production. You never get to restore your stockpiles, so you are starting off lower and lower as you go on.”Bottom of Form
Wheat’s surge slowed Wednesday, dropping more than 6% after Russia agreed to not disrupt shipping of Ukrainian grain in the Black Sea. The price had surged earlier when Russia said it would withdraw from the agreement.
The threatened withdrawal raised concerns about inflation, supply chain disruptions and the effects of a grain shortage on lower-income countries.
Adding to the rising prices is that US winter wheat is having one of its worst starts in years, the USDA Crop Progress Report said this week.
Russia and Ukraine, both among the world’s biggest wheat exporters, have shipped about a third of their usual volumes so far this year, Minter said.
Commodities looking attractive
The $340m Teucrium Wheat ETF (WEAT) is up about 20% year to date compared with S&P 500 ETFs losing around 20%. WEAT has also pulled in $348m assets so far this year. The combination of drought and war may suggest further gains.
Indeed, exposure could help to alleviate some of the effects of inflation. Food inflation, in particular, is something that affects everyone, Minter noted.
He added investors do not have enough exposure to commodities in general, largely because they fell back on defensive positioning due to expectations of a severe recession.
He said there is not enough supply with very low inventories for many commodities, both factors setting up commodities for positive returns, and that there are a number of commodities that show investors in net short positions.
“No one is positioned for an uptick in the Chinese economy or a mild recession [rather than] a severe recession,” Minter added. “The fundamentals at some point are going to start to matter rather than the macro messages.”