Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How Wheat Futures Surged While the Dollar Strengthened
Transcript
- Lucas: So wheat is up six percent in the last five days, trading at six twenty-five a bushel, and this rally is happening while the dollar is actually getting stronger. That's the kind of move that makes you stop and ask: what's really going on here? Luna: Yeah, because normally a stronger dollar is a headwind for dollar-denominated commodities. So wheat is bucking the trend pretty aggressively. What's driving it? Lucas: It's a supply shock, very specifically in Russia. There was a late-season frost in late May across the southern Volga region and parts of the Black Earth district — that's where Russia grows most of its high-protein milling wheat. The frost hit during the flowering stage for winter wheat, and early estimates suggest yield losses of maybe ten to fifteen percent in those key areas. Luna: And Russia is still the world's biggest wheat exporter. So a hit there ripples fast through global prices. Lucas: Exactly. Russia exported something like fifty million metric tons of wheat last season. Even a ten percent drop in their exportable surplus takes about five million tons off the global market. And the market is pricing that in right now. Luna: But how does that square with the USDA's global supply and demand numbers? I thought we were looking at relatively comfortable stock levels going into this season. Lucas: We are. The USDA's May WASDE report showed global ending stocks for wheat at around two hundred sixty million tons — that's not tight by historical standards. But here's the nuance: those stocks are concentrated in China and India, and neither country is a major exporter. The rest of the world — the exporters that actually matter for global trade — they're carrying much leaner inventories. So when a key exporter like Russia gets a crop failure, the tradeable surplus gets squeezed fast. Luna: That's a really important distinction. It's not about total global supply, it's about supply that can actually move through trade. Lucas: Right. And then you layer on the dollar strength. The dollar index is up on the back of that hawkish Fed signal from Kevin Warsh's first meeting — the market is pricing in a possible rate hike later this year. Normally that crushes commodity prices. But wheat is rising because the supply signal is overpowering the currency signal. That tells you the market sees this as a real, tradeable shortage. Luna: And we're seeing it spill over into other grains too. Corn is up one and a half percent, soybeans nearly three percent. Lucas: Soybeans are a different story — they're more tied to weather in South America and to Chinese demand. But corn often trades in sympathy with wheat because of feed substitution in some regions. Though I'd caution: this isn't a repeat of the 2022 food price shock. Back then, you had Russia's invasion of Ukraine, energy prices spiking, fertilizer costs through the roof, and multiple crop failures at once. Today, the drivers are narrower. It's really a Russia-specific weather event. Luna: And let's not forget the other side of the supply equation. Brazil is heading for a record wheat harvest this year, maybe ten million tons or more. That's not enough to replace a Russian shortfall, but it does provide some offset. Lucas: Exactly. Brazilian wheat is mostly lower protein, so it doesn't directly substitute for Russian milling wheat in bread production. But it can go into feed and lower-grade uses, which frees up other supply. So the price response might be more muted than if this frost had hit, say, the US hard red winter wheat belt. Luna: So what does this mean for food inflation? CPI was already sticky — May CPI came in at 334, up from 332.4. Food at home is a big component. Lucas: It's a risk, but I think it's manageable. Bread and cereal products have a lagged pass-through — it takes months for higher wheat futures to show up on grocery shelves. And the ten-year breakeven inflation rate actually ticked down to two point two six percent, so bond markets aren't panicking about a sustained food price spiral. Still, if this Russian crop damage turns out worse than expected — if the frost affected more acreage than currently estimated — then we could see wheat testing seven dollars, and that would start to feed through into CPI by the fall. Luna: And that's exactly what traders will be watching when the next USDA crop progress report comes out next week, and any revised Russian export estimates. It's a real-time supply chain story. Lucas: It is. And it's a reminder that even in a macro environment where the dollar is rallying and the Fed is hawkish, specific commodity markets can decouple when the fundamentals are strong enough. The wheat market is giving us a masterclass in that right now. Luna: It's good to have a concrete example like this to think through. And if today's deep dive was useful to you, here's a quick thought — the reason we can do this without ads is listener support. So if you've gotten something out of it, buy me a coffee dot com slash fexingo helps keep the show running. Lucas: Yeah, that's exactly right. It's a small gesture that makes a big difference for us. So speaking of what we're watching next — I think the next big catalyst for wheat will be the USDA's acreage report at the end of June. If we see a shift from spring wheat to corn or soybeans in the Northern Plains, that could add another layer of supply tightness. Luna: And the other wild card is export demand. We've seen some aggressive buying from Egypt and Turkey in recent weeks. If that continues, it'll put further pressure on the Russian shortfall. So plenty to keep an eye on. Lucas: Absolutely. Wheat is suddenly the most interesting commodity out there. We'll keep tracking it for you. Thanks for listening.