Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Wheat Is Falling Despite Global Food Inflation
Transcript
- Lucas: Wheat is down three point eight percent over the past five days, and it's happening while the CPI and PCE numbers still show food inflation running hot. That's the kind of head-scratcher that usually means the market is looking at something the official data hasn't caught yet. Luna: The CPI for April came in at three hundred thirty-two point four, up from three thirty in March. The PCE deflator ticked up too. So grocery prices are still climbing — but the raw grain that goes into flour and bread is getting cheaper. Lucas: Right. The disconnect is between the commodity itself and the finished product. Wheat futures are down because the market is pricing in a massive global supply glut. Russia is on track for another record harvest — something like ninety million tons — and Ukraine, despite the war, has managed to keep exports flowing through the Black Sea corridor. That's a lot of grain chasing buyers who aren't exactly lining up. Luna: And the demand side? The global economy is slowing. The PMI numbers out of Europe and China have been soft. So millers and bakers aren't stocking up the way they would if they expected prices to rise. Lucas: Exactly. The futures curve tells the story. Nearby contracts are trading below deferred months — that's a contango structure. It means the market expects wheat to get cheaper before it gets more expensive. So commercial buyers can wait. They don't need to lock in prices now. Luna: Which is exactly the opposite of what you'd expect if food inflation were truly accelerating. If millers thought prices were about to spike, they'd be buying forward coverage. Instead they're sitting on their hands. Lucas: And there's a geopolitical twist here that's worth noting. The Iran conflict has reshuffled trade routes in the Middle East. Some grain shipments that used to go through the Red Sea are now taking longer routes, which increases shipping costs. But that's a logistics cost, not a grain cost. The FOB price at the Black Sea port is still falling. Luna: So the headline — food inflation persists — is about the last mile. Processing, labor, energy, packaging. The raw commodity is actually deflationary right now. Lucas: And that's the kind of nuance that gets lost when you just look at the CPI headline. The Bureau of Labor Statistics breaks it down: food at home was up something like one point six percent year-over-year in April. But within that, cereals and bakery products were actually up less than meats and dairy. That's partly because wheat costs have been falling. Luna: But if wheat keeps falling, shouldn't we eventually see that at the grocery store? Like, a lag of six to twelve months? Lucas: In theory, yes. But there's always a buffer. The big millers — companies like archer daniels midland and Bunge — they hedge their grain purchases months in advance. So they're still working through higher-priced inventory. By the time the cheaper wheat flows through, something else — labor, energy, transportation — might have gone up. So the consumer doesn't always feel the commodity drop. Luna: It's a bit like the oil story we've seen over the past year. Crude drops, but gasoline prices at the pump take weeks to follow, and even then taxes and refining margins blunt the pass-through. Lucas: Exactly. And that's actually a good way to think about why the market structure matters more than the spot price. The futures curve tells you about expectations and incentives. Right now for wheat, the contango is telling commercial hedgers: don't rush. That reinforces the price decline because it pushes buying further out. Luna: And it's not just wheat. Look at corn — down five point two percent in the same five-day window. Soybeans down three point eight. It's a broad-based agricultural selloff. Lucas: Which makes sense if the macro story is: ample supply from the Black Sea, combined with slowing demand. The USDA's World Agricultural Supply and Demand Estimates report, the WASDE, is due out later this week. The market is already pricing in higher ending stocks for wheat globally. If the report confirms that, you could see another leg down. Luna: Before we get too deep into the WASDE, I want to stay on this idea of the consumer not seeing the benefit. Because that feeds into a bigger frustration people have — they hear that commodity prices are falling, but their grocery bill isn't. It fuels the perception that inflation is 'sticky' or that companies are price gouging. Lucas: And that's a fair frustration. But part of the explanation is structural: food prices have a large services component. The raw agricultural commodity accounts for only about fifteen percent of the final cost of food at home. The rest is processing, packaging, transportation, labor, energy, rent, profit margins. Those costs haven't come down. Luna: In fact, the latest PCE data showed services inflation still running above two percent. So even if wheat keeps falling, the service layer keeps prices elevated. Lucas: And there's another angle here: the dollar. The U.S. dollar index has been relatively firm, and a strong dollar makes dollar-denominated commodities like wheat more expensive for foreign buyers. That also dampens demand. Luna: So the wheat market is getting squeezed from both sides — supply is abundant and getting cheaper, but demand is softening because of the strong dollar and slow global growth. Lucas: And you're also seeing some interesting regional divergence. European wheat prices — the Paris milling wheat contract — have held up a bit better because drought conditions in parts of France and Germany have trimmed yield expectations. But the global benchmark is still the Black Sea price, and that's falling. Luna: So for a listener who's watching their grocery bill, the takeaway might be: don't expect bread to get noticeably cheaper anytime soon, even if wheat futures are down. But if you're an investor, the contango structure and the supply overhang suggest wheat has further to fall unless something shifts on the demand side. Lucas: And speaking of making sense of these markets — we spend a lot of time on this show trying to connect the dots between commodity prices and the real economy. We deliberately don't run ads on these. If that kind of independent analysis is valuable to you, and you want to support the show staying ad-free, the link is buy me a coffee dot com slash fexingo. No pressure, just a way to keep doing what we do. Luna: Yeah, completely agree. It's a small gesture that makes a big difference for us in terms of keeping the podcast free and open. Lucas: Alright, back to the data. So we've talked about why wheat is falling despite CPI showing food inflation. But let's not ignore the elephant in the room: the Iran conflict and its impact on global trade. The conflict is now a hundred days old, and one of the quieter effects has been on grain shipping routes through the Strait of Hormuz and the Red Sea. Luna: The headlines this weekend are all about the U.S. potentially using Iranian assets for reconstruction in the Gulf. But for commodities, the real story is that insurance premiums for vessels transiting the region have spiked, and some shipping lines are rerouting around the Cape of Good Hope. That adds time and cost. Lucas: And that cost shows up in the freight rates, not in the FOB price of wheat. So the landed price of wheat in, say, Egypt or Saudi Arabia is higher even though the Black Sea price is lower. That's another layer of complexity. Luna: It also creates opportunities for alternative suppliers. Australian and Argentine wheat becomes more competitive if Middle Eastern buyers are worried about shipping disruptions. The trade flows are adjusting. Lucas: And that's actually a bullish factor for wheat prices in those exporting regions. But it doesn't change the global supply glut. The International Grains Council is projecting global wheat stocks at a five-year high. So even with some rerouting, the overall picture is one of abundance. Luna: One thing I find interesting is how this contrasts with the narrative a year ago. Back then everyone was worried about food shortages because of the war in Ukraine. Now we're back to worrying about gluts. Lucas: That's the nature of agricultural markets. A good harvest can flip the narrative overnight. And we've had two consecutive years of good weather in the Black Sea region. The risk now is that farmers in the U.S. and Europe might cut acreage for next season if prices stay low, which could set up a rebound later. Luna: So the futures curve contango is also signaling that the market expects a recovery at some point. The deferred contracts are higher, which implies that producers should hold off selling into the current weakness. Lucas: Exactly. And that's the kind of signal that commercial hedgers actually act on. If you're a farmer, you look at the forward curve and decide whether to sell now or store your grain and sell later. The contango encourages storage. That itself helps support the market because it pulls some supply off the spot market. Luna: So the current selloff might actually be self-limiting to some degree. As prices fall, storage becomes more attractive, which reduces available supply, which eventually puts a floor under prices. Lucas: Right. But that floor might be lower than where we are now. The USDA's cost of production estimates suggest that break-even prices for U.S. winter wheat are around five dollars a bushel. We're at five eighty. So there's still some downside before farmers start making decisions to store rather than sell. Luna: And the other thing that could change the picture quickly is weather. We're heading into the northern hemisphere growing season. If there's a drought in the U.S. Plains or in Europe, the supply outlook tightens and prices reverse. Lucas: That's the thing about commodities — you always have to watch the weather, the geopolitics, and the macro all at once. Right now the macro and the geopolitics are aligned on the bearish side for wheat. But that alignment can break in a hurry. Luna: Alright, so let's try to summarize for listeners. Wheat is falling because Russian and Ukrainian supply is abundant, global demand is softening, and the dollar is strong. The futures curve is in contango, reinforcing the bearish sentiment. But food inflation remains high because the commodity is only a small part of the final price, and other costs — labor, energy, transport — are still elevated. The Iran conflict complicates shipping but doesn't change the fundamental surplus. Lucas: That's a solid summary. One last thing I'd add: keep an eye on the WASDE report this week. If it confirms higher ending stocks, we could see another leg down. But also watch for any hints of acreage reduction in the next planting intentions report. That could be the early signal of a turnaround. Luna: And for anyone who wants to dig deeper into these market dynamics, we'll have the full transcript and links to the data sources on the show notes. Lucas: Perfect. That's all for this episode of The Commodities Economy. Thanks for listening.