A Crumbling Breadbasket

We need shelter, we need food, and we need water.  With the worlds breadbasket under attack since early last year, supply of wheat  has been devastated while other grains like soybeans and corn have had their own inventory issues.  What will happen this year?






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Transcript

A Crumbling Breadbasket
Season 3: Episode 3

 Katz: Welcome to the Real Spiel with Ryan and Kurt. Let's talk about grains, an often-overlooked commodities sector. When you hear commodities, most investors think about petroleum energy, you know, gold, other metals, copper, but grains are a key piece. Not only to the global food supply, but a lot of commodity investments. Let's start Kurt with wheat. You know, around 20 to 30 percent of the world's wheat supply comes from the Russia and Ukraine regions and obviously there's some you know, issues there that's going to affect supply coming out of that region. What are your thoughts on the on the wheat markets? Looking ahead for 2023.

 Nelson: Hey Ryan, I think wheat is particularly interesting. You're right, that region is considered the breadbasket of the world, because literally a huge portion of the world's grains and oil seeds come from there, in particular wheat. You mentioned before the importance of oil, or energy petroleum, industrial metals, maybe gold. But when you think about Maslow’s hierarchy of needs, we need shelter. We need food. We need water. And you know these grains, particularly wheat in this example is a critical food supply for many countries in the world. There are Mediterranean and North African countries that rely 100% on Russia and Ukraine to be able to provide them with their annual supply of wheat. And those disruptions to supply have been impactful on inflation, food costs, and you know undernourishment and hopefully not but potentially starvation down the road. We saw this play out back during the Arab spring in Egypt, which was really you know, sparked by the fact that there was a national under supply of wheat, that the common people, the populace, had been lied to by the central government about the supplies of wheat that were available, and in fact they weren't there. And there were shortages of bread and just food staples.

 So, wheat is a great example, right? It's produced in a significant way from this region between Ukraine and Russia, which is under conflict. That conflict has been going on for ten months. Much, much longer than any of us anticipated. The other thing about wheat is that you know, it is produced on harvest cycle. So, it's different then copper or gasoline where you can produce it 24/7 on a steady basis. You have to produce it on a harvest cycle, and you need the right amount of, you know heat, the right amount of water, the right amount of sun. Not too much wind. And you need these proper conditions. Interestingly something that we haven't touched on is that you need, you know, in modern agriculture, significant amounts of fertilizer. Which are usually phosphates, and I don't think it's talked about enough that Ukraine and Russia produce, you know 15ish to 20 percent of the world's fertilizer. So, because it's very energy intensive to produce it. And those supplies have been disrupted. Those prices have gone up really high. So not only are there production constraints in Russia and Ukraine to produce wheat, But you also have yield constraints because you don't necessarily have access to or the ability to buy at these high prices the fertilizers that you would otherwise use to enhance crop yield. So, I think wheat is particularly interesting. 

 The other thing I would focus on, Ryan, is something we talk about a lot on the show, which is inventory levels and scarcity. Inventories for example, on the COMEX exchange. So, this is the major US exchange for wheat futures. And they have warehousers and the USDA publishes public data on stores that's above ground of produced wheat that's available for use. Those storage levels in January 2023 are below the January level of the prior five years. So, we haven't been as low in storage and available inventory of wheat supplies in at least five years if not more. So, I think the setup really kind of skews to the upside that if we have any the disruption to, you know, to weather, to fertilizer access, to labor, etc., you know, on a global basis for wheat production. The only thing that can give us price which would be to go higher. 

 Katz: Yeah. I think you're gonna see a lot of the same you know issues with the corn market? Right. I mean, you talked about inventories. I believe corns inventories or even at a lower level than wheat if you look at the past five years?

 Nelson: That's correct. And you know, I think, wheat is directly impacted by this Ukraine Russia conflict, corn not so much. However, it's an alternate grain source and carbohydrate source for food production and corn inventories are equally low. They're below the prior five-year average. Even a staple such as soybeans which is critical. Soybeans are typically crushed much like a barrel of oil. This is cracked into distillates; a soybean is turned into soybean meal through a crushing process. And soybean meal is a protein. And it's turned to soybean oil, which can be used as a bio diesel or as a food source. And soybeans themselves are not below their five-year average, but they're at their five-year or sorry at their five-year low for above ground storage of usable soybeans, deliverable soybeans to the market. So, I think the setup for grains is quite interesting, because these are commodities that we can't grow in hydroponic farms under fluorescent lights, you need to have these industrialized massive farms in the Midwest and across the US and you get typically one harvest cycle, and you have the Goldilocks scenario. You have to have the right sun, right. Water, the right heat, the right fertilizer and have all those conditions go well and then you get a bumper crop, which is fantastic. You can replenish warehouse stocks, you know, prices come down. There's ample food production.  It's not clear to me that you know that will happen in any given year. What you want to be able to do is if you have a bad year, you want to be able to go to above ground storage and deliver from there to fulfill a supply shortage because any difficulties at all and the manufacturing or harvesting process of these grains were sort of on our back foot here because supplies across the grains complex is low coming into what will be the kind of early planting cycle in about two to three months. You know, it's still too early to see expected plantings and to see kind of what's going to happen in the United States for the 2023 forecast of grain production. But what we do know, as you know, Ryan, is that this conflict in the Ukraine Russia region is heating up if anything, it's not slowing down. We know that trans shipments of grains out of Ukraine have occurred, but they're having a really tough time getting to market, even with the ceasefire or negotiation that Turkey helped to broker. We're still seeing fewer ships than expected grains that are still landlocked in Ukraine and can't get to market to, for example, Lebanon, or Egypt or North African countries where it's critically needed. So, I think the setup for grains is quite interesting. Going into 2023.

 Katz: Great an often-overlooked sector but definitely a lot of tailwinds at least it looks like for the remainder of 2023 with a couple of really light yields on corn at least, corn markets here in the Midwest, and obviously the conflict out in Ukraine and Russia is not helping. Thank you all for dialing in again this week. This has been The Real Spiel with Ryan and Kurt. We'd love to hear your comments questions feedback and can be reached at therealspiel@USCFInvestments.com  and we'll talk to you next week.