Wheat Price Volatility: Drivers and Impacts
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Ten years after the launch of AMIS and the Food Security Portal’s Excessive Price Variability Early Warning System, managing and reducing food price volatility remains a clear priority for global food security.
As reported earlier this month, global wheat prices declined slightly in June after 12 straight months of increases. The recent decline was based on favorable production prospects in several major producing regions, including Europe, India, and the Black Sea region. Wheat futures prices followed suit, dropping by 6 percent in June.
However, global and national wheat markets remain tight, and excessive price volatility continues to be a concern. According to the Excessive Price Variability Early Warning System, hard wheat and soft wheat prices have experienced excessive volatility for the past 33 and 21 days, respectively. This represents the longest streak of excessive volatility since April-June 2020 for hard wheat and since September-October 2018 for soft wheat.
Wheat’s ongoing price volatility is being driven by several main factors. First, movements in wheat prices are impacted by price movements for other major commodities, particularly maize, which is also experiencing a period of excessive volatility. Second, while overall global wheat production forecasts are favorable, the news is not good across the board. According to the latest AMIS Market Monitor, spring wheat harvests in both North and South America could be threatened by ongoing heatwaves and subsequent dry conditions. As weather forecasts in these regions change, wheat prices experience similar variability. Third, some countries are currently facing low domestic wheat supplies, leading to higher import demand and lending support for higher prices.
The current situation in the global wheat market also highlights how governmental policies can inadvertently drive higher price volatility. At the start of the 2021-2022 marketing season, India’s government, through the Food Corporation of India, increased public procurement of wheat from 4.8 million mt in April 2020 to 20 million mt in April 2021. These purchases are aimed to both support Indian farmers by offering guaranteed prices for their crops and aid poor consumers by providing staple grains at subsidized prices. India is expected to see a surplus wheat crop this season; at the same time, ongoing restrictions related to the COVID-19 pandemic have made it more difficult for farmers to trade with private buyers. These two factors likely account for the dramatic increase in public procurement.
India itself has seen price spikes in several local wheat markets over the past 30 days, according to the Food Security Portal’s Food Price Monitor. In addition, these higher government purchases for domestic use could bring increased volatility in regional and global markets. WTO rules preclude government food stocks, like those maintained by the Food Corporation of India, from being exported. Thus, by increasing its domestic stocks, India has effectively limited its exportable volumes. And because the country is the world’s second largest producer of wheat, reduced exports from India could lead to substantially lower global supplies and subsequent higher prices. Export restrictions were a major contributing factor to the food price spikes seen in 2008 and 2012.
With multiple factors playing into concerns over price volatility for wheat and other major commodities, policymakers will need to work collaboratively to ensure that domestic, regional, and global markets are stable and well-functioning.