The 5thWave Forum

Headed to the Bread Lines

Major wheat importers saw spikes in demand around the 2008 financial crisis as well as the 2011 Arab Spring. Inflationary pressures could make conditions ripe for such a buying spree in 2020 once again. (Chart by Tregg Cronin)

The speed that news and markets are changing seems faster than ever. The news cycle feels seconds-long and volatility in markets can leave the deep-pocketed searching through couch cushions. One of the more impressive features in ag markets of late has been the surge in buying by wheat mills as they scramble to replace product on store shelves. Quarantine measures are forcing consumers to stock up on food staples, such as dry pasta, while loaves of bread hit the freezer. The buying would lead one to believe demand for wheat could surprise to the upside this marketing year in the United States and abroad. If history is any guide, the answer is not quite so clear, which is just the way wheat traders like it.

The USDA's latest estimates for global wheat use in 2019-20 were released in early March, and peg food, seed and industrial use (FSI) at 604.206 million metric tons (mmt) or 22.198 billion bushels (bb). This is an all-time record for FSI use and would be up 1.64% from a year ago. The five-year average for FSI use is 1.24%, which coincidently, is almost the exact world population growth of 1.2%. The 10-year average for FSI use is 1.49%. Regardless of how far back one looks, FSI use tends to average out near global population growth, a reasonable conclusion to draw. However, we aren't interested in averages, considering the coronavirus is producing an environment that is anything but average. A much more pertinent comparison would be the 2010-11 Arab Spring or the 2008-09 financial crisis -- two events that saw countries scrambling for food staples around the globe. From a global perspective, 2010-11 saw global FSI growth of 1.71% while 2011-12 produced growth of 0.89% for an average of 1.3%. The financial crisis saw FSI use of 0.69% in 2008-09 and 2.90% in 2009-10 for an average growth of 1.79%.

Global trends can often mask more interesting short-term gyrations, making a look at key stakeholders in the global wheat market worthwhile. For this portion of our investigation, we pulled import data for the five largest wheat importers in the world, but also looked at other major importers in the Middle East as well as the energy-rich nation of Venezuela. One major theme oil-producing nations outside of Russia and the United States have in common is they import copious amounts of wheat. Looking back at our two preferred time periods of 2008-09, 2009-10 and 2010-11, 2011-12, we see some very interesting data points. During the financial crisis, Iran and Saudi Arabia saw massive increases in wheat imports, jumping 3,300% and 1,600%, respectively, from 2007-08 to 2008-09. Prior to the financial crisis, Saudi Arabia was not a major wheat importer, but it was also around this time that they made the decision to stop producing wheat domestically. The massive percentage jump owes more to the decision to stop raising the crop than panic buying related to inflation. Still, solid jumps in imports were witnessed by other major importers with 2008-09 growth of 28% for Egypt, 41% for the Philippines, 60% for Turkey and 27% for Jordan. During the Arab Spring, we also saw a sizable jump in imports with Egypt up 9.9%, Iran up 33%, Turkey up 9.7% and Saudi Arabia up 67%. While not directly involved with the Arab Spring, other major wheat importers saw a sizable increase in wheat imports as few countries wanted to be left with an empty cupboard while others panic bought. In 2011-12, Brazilian imports rose 9.64%, the Philippines were up 24.7% and Venezuela rose 14.7%.

The United States is front and center on the coronavirus battle and has seen some of the most noticeable panic buying of consumer staples. FSI consumption in the United States is pegged at 1.014 bb in 2019-20, which is almost exactly the five and 10-year average. The Arab Spring obviously didn't have the same effect domestically in the United States as it did in many Middle East countries, and there was no corresponding change to FSI use. Similarly, during the financial crisis, little to no change was seen in FSI use. Despite food and diet fads, food demand for wheat has changed little over the last 10 to 20 years. Exports, however, did see big swings around the two events in question. In 2008-09, exports fell to 1.015 bb from 1.262 bb the year before and sank lower still to 879 million bushels (mb) in 2009-10. However, exports rebounded sharply to 1.291 bb in 2010-11 and 1.051 bb in 2011-12.

Pictures of empty store shelves around the United States make for good headlines, but long term, little change is expected for food use either in this marketing year or next. When a surge in buying takes place domestically, millers and bakers usually switch to lower end wheat and flour that can produce utility bread products in a timely manner. The same should be true in the United States around the coronavirus, provided quarantine measures do not drag on longer than expected.

Global wheat demand is a much more complicated question, however, as history has shown. During times of panic, major wheat importers have shown a willingness to increase purchases above and beyond traditional growth rates. We think the same will be true this time around, especially as easy monetary policy is employed around the globe, keeping inflationary pressures high. The United States has become known as the "supplier of last resort" in the wheat market, able to step in when other supplies have been exhausted. The U.S. stepping in to play that role this spring and summer could be a big component of wheat continuing its rally.

Tregg Cronin can be reached at tmcronin31@gmail.com

Follow Tregg Cronin on Twitter @5thWave_tcronin

(BE/BAS)