Based on the economic key indicators, the US economic outlook is looking healthy. After the US reports a 3% increase in the country’s GDP in 2018, many financial specialists state that this will gradually slow down because of the trade war that the Trump Administration started (Amadeo, 2019). Nevertheless, while the futures contract for commodities is still very volatile, experts still offer an optimistic and favorable forecast. According to an extension grain marketing specialist, Dr. Todd D. Davis (2018) despite the big drops reported in 2013 (-22.20%), 2014 (-2.60%), 2015 (-20.27%), and 2016 (-13.19%) in the wheat market, it might still be able to hold the significant market performance that was documented in 2018 (+17.88%) (Refer to Table 1 for the data). This paper will focus on analyzing and making a projection on price volatility in the wheat market using historical data from the last ten year (2008-2018). Furthermore, this paper will identify the factors that affected the price of wheat in the global market and determine the indications and implications of the rise and fall of wheat price.
Commodities and Price Volatility
According to the 1936 Commodity Exchange Act, commodities are considered as hard assets (Till, 2016). These commodities are grouped into three distinct categories: (a) agricultural, (b) metal, and (c) energy. Amongst the agricultural commodities are wheat, corn, rice, and sugar. These may also refer to things that cannot be digested like lumber and cotton. Animals refurbished for eating like live cattle and pork are also considered agricultural commodities. The principle of commodities trading dictates the price of the commodity. This principle, in effect, is the reason why the cost of these essential commodities is very volatile. There is always movement in the price of commodities daily. The value of these item fluctuates very rapidly making it difficult for consumers to form a stable projection.
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The price of commodities is very erratic. Price volatility is a terminology used to refer to the fluctuation of the price of a commodity. However, it is essential to take note that price volatility does not apply to the level of the prices but on the degree of variations reported during the movement in the price. Volatility is affected by the law of supply and demand. Since the bulk sells commodities, buyers are trading them using futures contracts. This is an agreement that the price of the commodity is fixed at an agreed amount until a specific set of time. Commodity contracts are priced in the US dollar. Therefore, when the value of the dollar increases, the price of commodities falls because at this rate it will take fewer dollars to purchase the same volume of the commodity.
Price Volatility of Wheat over the Past 10 Years
In the case of the price of wheat, price appears to stable over the past ten years (2008-2018). However, price volatility covering this period is very high as reflected in Graph 1.
Graph 1: Price Volatility in the Wheat Market (2008-2018)
According to Graph 1, the highest price of wheat was recorded in 2008 at $12.8250, while the lowest price was recorded in 2017 at $4.0225 ("Wheat Prices - 40 Year Historical Chart", 2019). However, based on the historical data the highest volatility was recorded in 2002 with the high of $12.8250 before it made the low of $4.7550 ("Wheat Prices - 40 Year Historical Chart", 2019). The historical data shows the price of wheat was very volatile given the significant variations of high and low in the price of wheat in the market.
Factors Affecting the Price of Wheat
There has been quite number of factors that contributes to the change in the prices of commodities in the market. Amongst those include weather conditions, production, importation, shortage levels, delivery constraints, and market information (Till, 2016). In the case of wheat, the price of this commodity in the global market has been significantly affected by the recent economic recession in the US that dramatically affect the valuation of the US currency, yield output, import tariffs, and weather conditions (Enghiad, Ufer, Countryman & Thilmany, 2017; Elsheikh, Elbushra & Salih, 2015; Kharas, 2011; von Braun, 2008).
Economic Recession. The economic recession that the United States experienced in 2008 severely affected many industries, including the agricultural sector. A report on the effect of global economic crisis noted the significant downtrend in the performance of commodities. According to a New York Times correspondent, the 40% dropped in the price of corn and wheat which follows an impeccable good performance it made prior to the drop (Krauss, 2008). It was believed that this performance was because of the bull market. A significant high will be recorded before it makes a similar significant low. The threat of shortage in the supply caused people to panic, therefore, they tried to purchase more of the product resulting to an increase in the price. However, when the consumers thought that they had enough supply in, this resulted to the consumers trying to keep more of their money instead of spending out of fear that the worst is yet to come, and it is better to have cash in reserve.
Yield Output. If one is to review the trend in wheat price within a given year, it is noted that at a certain time of the year, especially during winter, the harvest is not as productive as it is during spring. The low yield during this season results to higher price by virtue of the law of supply and demand. Limited supply or even just the news that there would probably be a shortage causes people to panic. The suppliers take advantage of this scenario and raise the price of wheat to ride on the hype created by the shortage news. However, in the event that there is really low wheat output, the increase in price of wheat is reasonable because while supply is limited, the demand is the same. Thus, people are even more willing to pay a little extra to meet their needs. This situation could be beneficial for other crops like rice and corn which are alternatives to wheat. If there is sufficient supply of substitutes, the price of these commodities will increase as more people will start demanding for an alternative to wheat.
Import Tariffs. A study in 2015 analyzing the effect of wheat’s import tariffs presented an insightful analogy. According to the authors, since the domestic production of wheat varies significantly over time, as if often falls short in meeting the local demand, some government are contemplating on imposing lower tariffs on the importation of wheat. This would result to increase importation of wheat which will create a ripple effect—lower the price of domestically produced wheat, lessen the resources needed to produce wheat, and reduce the importation of other agricultural products (Elsheikh, Elbushra & Salih, 2015).
Conclusion
In conclusion, it was found that while wheat is considered a basic commodity, whose price is highly dependent on the value of the US dollar, the law of supply and demand still plays a significant part in price volatility.
| Year | Average Closing Price | Year Open | Year High | Year Low | Year Close | Annual % Change |
|---|---|---|---|---|---|---|
| 2018 | $4.9757 | $4.3350 | $5.7450 | $4.1650 | $5.0325 | 17.86% |
| 2017 | $4.4014 | $4.0650 | $5.6000 | $4.0225 | $4.2700 | 4.66% |
| 2016 | $4.3945 | $4.5825 | $5.1950 | $3.8065 | $4.0800 | -13.19% |
| 2015 | $5.0836 | $5.8150 | $6.1555 | $4.6525 | $4.7000 | -20.27% |
| 2014 | $5.8908 | $5.9700 | $7.3900 | $4.7400 | $5.8950 | -2.60% |
| 2013 | $6.8608 | $7.5525 | $7.9125 | $6.0050 | $6.0525 | -22.20% |
| 2012 | $7.5412 | $6.5700 | $9.4325 | $5.9225 | $7.7800 | 19.19% |
| 2011 | $7.1443 | $8.0550 | $8.8600 | $5.7740 | $6.5275 | -17.82% |
| 2010 | $5.8712 | $5.5775 | $7.9925 | $4.2800 | $7.9425 | 46.68% |
| 2009 | $5.3381 | $6.1100 | $6.7450 | $4.4125 | $5.4150 | -11.34% |
| 2008 | $7.9908 | $9.1500 | $12.8250 | $4.7550 | $6.1075 | -30.99% |
| Table 1: Wheat Price – Historical Annual Data | ||||||
Reference
Amadeo, K. (2019). What Will the Economy Do in 2019 and Beyond?. Retrieved from https://www.thebalance.com/us-economic-outlook-3305669
Davis, T. (2018). Wheat Outlook for 2018-2019 and Preliminary 2019-2020 Projections. Retrieved from https://www.kysmallgrains.org/news/2018/11/27/wheat-outlook-for-2018-2019-and-preliminary-2019-2020-projections
Elsheikh, O., Elbushra, A., & Salih, A. (2015). Economic impacts of changes in wheat’s import tariff on the Sudanese economy. Journal of The Saudi Society of Agricultural Sciences , 14 (1), 68-75. DOI: 10.1016/j.jssas.2013.08.002
Enghiad, A., Ufer, D., Countryman, A., & Thilmany, D. (2017). An Overview of Global Wheat Market Fundamentals in an Era of Climate Concerns. International Journal of Agronomy , 2017 , 1-15. DOI: 10.1155/2017/3931897
Kharas, H. (2011). Making Sense of Food Price Volatility. Retrieved from https://www.brookings.edu/opinions/making-sense-of-food-price-volatility/
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Till, H. (2016). An Introduction to U.S. Commodity Futures Markets: A Historical Perspective Along with Commodity Trading Principles. SSRN Electronic Journal . DOI: 10.2139/ssrn.2821161
USDA - National Agricultural Statistics Service - Education and Outreach - Research Reports, by Date. (2008). Retrieved from https://www.nass.usda.gov/Education_and_Outreach/Reports,_Presentations_and_Conferences/Reports_by_Date/index.php
Von Braun, J. (2008). Food and Financial Crisis: Implications for Agriculture and the Poor. Retrieved from https://ageconsearch.umn.edu/bitstream/47663/2/pr20.pdf
Wheat Prices - 40 Year Historical Chart. (2019). Retrieved from https://www.macrotrends.net/2534/wheat-prices-historical-chart-data
