Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Wheat Is Outpacing Oil in a Cooling Economy
Transcript
- Lucas: So wheat is up over eleven percent in the last five days, and oil is down nearly four. In a normal week, those two don't move like that in opposite directions. But this isn't a normal week. Luna: I saw the number this morning — eleven point two percent on the Chicago contract. That's not a blip, that's a statement. What's driving it? Lucas: Look, before we get into the weeds, if walking through the economy with us has made something click for you, we'd love it if you grabbed us a coffee. It's buy me a coffee dot com slash fexingo. Keeps the show ad-free, and honestly, it's the smallest ask we can make. Luna: Yeah, it genuinely helps us keep doing this. And speaking of making things click, I'd love to understand this wheat rally. Lucas: Right, so the immediate trigger is weather. The Northern Hemisphere's wheat belt has been baking all summer. Parts of Kansas, Oklahoma, and the southern Russian steppes are seeing the driest conditions in decades, and that's hitting the hard red winter crop hard. The Chicago soft red winter contract is the one everyone watches, and it's spiking because the market's starting to price in a real supply shortfall. Luna: But we've had hot summers before. Why is this one different? Lucas: Because it's not just the heat — it's the timing. The crop's in its critical grain-fill stage, and that's when water stress does the most damage. You get a couple of weeks of hundred-degree temperatures right when the kernels are forming, and you lose yield that you can't get back. Add to that the fact that Russia, which is the biggest exporter, has been dealing with its own heat dome, and you've got a perfect storm. Luna: So supply fears are driving this. But oil is sliding on demand fears, right? That's the divergence in a nutshell. Lucas: Exactly. Oil's down about one point seven percent on the week, and Brent's off nearly four. The market's looking at a cooling global economy and thinking there's going to be less fuel burned. But wheat is a supply story, not a demand story. People still need to eat, regardless of how the economy's doing. Luna: And it's not just wheat. Corn is up eight percent, soybeans up four. The whole grains complex is moving. Lucas: Right, because they're planted in the same regions and they compete for the same acres. When wheat's looking bad, the market starts thinking about whether farmers will switch to corn next year, and that tightens the supply picture for everything. It's a contagion effect within agriculture. Luna: So is this a weather blip, or is there something more structural going on? Lucas: That's the million-dollar question. Part of it is weather, sure. But there's also a policy angle. The Fed's been keeping rates higher for longer, and that's strengthening the dollar. A stronger dollar usually puts downward pressure on commodity prices, but wheat's ignoring that because the supply story is so dominant. Luna: And tomorrow we have Jackson Hole. Kevin Warsh is speaking. If he hints at easing, the dollar could weaken, which would actually add fuel to the wheat rally. Lucas: Yeah, that's a real dynamic to watch. If the dollar drops, dollar-denominated commodities become cheaper for foreign buyers, so demand gets a boost. But wheat's already running on supply fears, so you could get a double whammy. Luna: Let's talk about the actual numbers. The Chicago soft red winter contract is at seven fifty-eight. That's up over eleven percent in five days. What does that mean for someone in the grocery store? Lucas: It means bread prices are going to feel it, but not overnight. The wheat that's in the pipeline now was bought at lower prices. The futures market is pricing the next harvest. So you'd see the impact at the wholesale level in a few months, and then at the shelf maybe six months after that. But it's coming. Luna: And with CPI still above the Fed's target, even a small food-price bump is going to complicate the picture. Lucas: No question. The latest CPI print showed inflation ticking up slightly, and food is a big component of that. The Fed's had a hard time getting it down, and a wheat-driven food price spike doesn't help. Luna: So if Warsh is hawkish tomorrow, we could see both oil and wheat fall? Or would wheat stay supported? Lucas: A hawkish surprise would strengthen the dollar, which would put some pressure on wheat — but I don't think it would erase the supply premium. The market's focused on acres and weather, and that's not going to change with a speech. It might just trim the rally a bit. Luna: What about the role of speculators? Are they amplifying this? Lucas: They're definitely part of it. Commodity funds have been rotating out of energy and into agriculture this week. You can see it in the open interest numbers. And when you get a breakout like this, you get momentum traders piling in, which can create a short-term overshoot. But the underlying supply issue is real. Luna: So if you're a farmer, this is great news. But if you're a baker, you're sweating. Lucas: Yeah, it's a zero-sum game for the moment. Farmers who locked in prices earlier are missing out, but those who held out are going to get a windfall. The bakers and food companies that didn't hedge are going to eat the cost, literally. This is why bread is a canary in the coal mine for inflation. Luna: And it's not just bread. Pasta, cereal, even beer — they all use wheat. So this has a wide reach. Lucas: Exactly. And it's not just wheat. Corn is up eight percent, soybeans up four. That's going to ripple through meat prices too, because feed costs are a big input. So this week's rally could be setting us up for a broader food inflation story heading into the fall. Luna: Let's zoom out. How does this compare to previous wheat spikes? Like the 2022 Russia-Ukraine invasion? Lucas: That was a geopolitical shock, and prices hit record levels. This is more of a weather-driven event, so the magnitude is smaller, but the market structure is similar. Both times you had a supply disruption in a key exporting region, and both times prices spiked. The difference is that in 2022, there was also uncertainty about export routes, which added a risk premium. Now, it's more about actual yield losses. Luna: So if the weather improves in the next few weeks, could we see a sharp correction? Lucas: Definitely. If rains come and they're widespread, the market could give back a big chunk of these gains. But the longer the drought persists, the more the market will start to question whether this is a new normal. It's a wait and see situation. Luna: And what about the U.S. dollar? It's been strong all year. Does that make U.S. wheat less competitive globally? Lucas: It should, in theory. But when you have a global supply shortage, buyers are less price-sensitive. They just need the grain. So even with a strong dollar, U.S. wheat is finding buyers. It's a seller's market right now. Luna: That's a good point. So who are the winners and losers in this rally? Lucas: Winners: U.S. farmers who have wheat to sell, and the agribusiness companies that trade it. Losers: emerging markets that are net importers, especially in the Middle East and North Africa. They're already struggling with food affordability, and this just makes it worse. Luna: And that's where it connects back to geopolitics. High food prices have historically been a trigger for social unrest. Lucas: Exactly. It's not just an economic issue, it's a stability issue. So the next few weeks are going to be really telling. If the drought breaks, we're back to a manageable situation. If not, we could see wheat stay elevated through the harvest and into next year. Luna: And with Jackson Hole tomorrow, the Fed's response to any inflation signal will be key. Lucas: Yeah. I think the takeaway is that wheat is telling us something about the physical economy that oil isn't. Oil is saying demand is cooling, but wheat is saying there are still supply bottlenecks that can't be fixed by monetary policy. That's a divergence we need to keep watching. Luna: Well said. And on that note, I'm going to go check the price of a baguette. Lucas: Probably a good idea. It might be a different number next week.