Written by Joseph Glauber , Senior Research Fellow, Markets, Trade, and Institutions Division, IFPRI
Price volatility in maize and wheat futures markets has increased in recent days, based on uncertainty over planting progress and conditions affecting grains and oilseeds in the United States and hot and dry weather in Europe and the Black Sea Region during the grain fill stage which has potentially affected wheat yields. Despite recent price increases, global stock levels remain relatively high and should sufficiently buffer the impact of potential production shortfalls.
IFPRI’s Excessive Food Price Volatility Early Warning System tracks daily volatility in the futures market for wheat, rice, maize and soybeans and through a statistical model determines whether those movements are abnormally high relative to historical volatility. As of July 19, 2019, futures price volatility for Soft Red Winter (SRW) wheat, Hard Red Winter (HRW) wheat and maize were all in the high volatility category, marking the first time since 2010 all three contracts were at that level at the same time. Volatility levels for soybeans and rice remain low.
What has caused the increase in price volatility? First, planting progress in the United States has been hindered by an abnormally wet spring across much of primary corn and soybean growing areas and cropping decisions have been further complicated by crop insurance provisions that allow insured producers to collect partial indemnity payments if they were prevented from planting the crop. The June 28th U.S. Department of Agriculture (USDA) Acreage report was a significant surprise to the market with corn area exceeding all trade expectations and soybeans falling well short of those same traders’ expectations. At the time the June planting survey was conducted (approximately the first two weeks of the month) as much of 17 percent of maize and 41 percent of the soybeans remained unplanted. USDA will resurvey farmers in selected states and report new area estimates in its August Crop Production Report but it likely will not be until October that a more precise estimate of planted area and production is known.
The second major factor affecting price volatility has been the hot and dry weather experienced over most of Europe and the Black Sea region over the past month. In its July World Agricultural Supply and Demand Report USDA reduced the size of the global wheat crop by nearly 10 million tonnes and wheat ending stocks by almost 8 million tonnes.
Supply concerns have boosted grain prices generally. The FAO cereal price index for June was the highest since January 2015 driven largely by increases in maize and wheat prices. Soybean prices have risen since mid-May reflecting planting uncertainties and improved prospects for a resumption of soybean trade between the United States and China.
Should there be concern over increased grain price volatility? In 2007/08, 2010/11 and 2012/13, grain and oilseed markets saw significant price spikes and periods of sustained high volatility in futures markets. Many of the underlying factors that were driving prices during those periods are less of an issue today. Energy and metal prices have fallen considerably as global GDP growth has slowed, particularly in the large emerging economies. Growth in biofuel production has slowed considerably since 2011. Global production has outstripped demand which has allowed stock levels to rebuild considerably since 2012. While stocks of maize and wheat held by major exporters have declined over the past couple of years, they remain well above levels seen during the price spikes above.
Price volatility will likely remain in the grain markets until a clearer picture emerges on the size of this year’s maize and wheat crops, but ample stocks should dampen that volatility once production levels are more certain. The graphic below shows the days of consumption use the ending stocks will fulfill. The data show that the ending stocks of major exporters are tightening but still remain high relative to 2012/2013.
Source: USDA, FAS, PSD Online Database
Joseph Glauber is a Senior Research Fellow of IFPRI's Markets, Trade, and Institutions Division (MTID).