Christian Farlin

Dr. Athnos

AREC 313

27 June 2023

How Contemporary International Economic Events Affect Domestic and International Wheat

Production By Analyzing Wheat Futures Market Supply And Demand Shifts

Agricultural futures markets have reacted to four key contemporary economic events:the

2007-2008 World Food Crisis, the 2010-2012 World Food Crisis, the COVID-19 Pandemic

(2020-2022), and the 2022 Food Crisis. By analyzing wheat futures market fluctuations in the

framework of political, economic, international, and regional factors, this multidisciplinary

approach will invoke a complex analysis of: how the domestic and international agricultural

futures markets reacted to key economic events; the impact of agricultural futures markets on

farmers; and how these trends could potentially be used to predict agricultural market fluctuations

in the next major economic event.

Agricultural futures are the ideal futures class to analyze historical trends because they

were the first futures introduced in 1865 via grain futures. Therefore, the agricultural futures

market contains historical trends that are absent in later futures—as commodity futures were

established before financial futures. The United States is the third largest wheat exporter, so

international economic swings and events should heavily impact the wheat futures market because

futures markets instantaneously react to economic shifts via price fluctuations. Arguably, one can

measure the overall health of a nation via analyzing wheat production. Wheat itself is used for
 Farlin 2

many types of human and animal food, and serves as an input for many types of fuel. Analyzing

wheat futures will better encapsulate the effect of economic events on U.S. wheat production

because other types of grains are cross-hedged by trading wheat contracts. Additionally, wheat

futures can be analyzed as a placeholder for wheat because changes in wheat supply and demand

factors are reflected in wheat futures prices.

The first key contemporary event is the 2007-2008 World Food Price Crisis, which caused

“wheat futures [prices to] spike then crash” (Janzen). Although the hardest-hit nations were

developing nations in Africa, small price fluctuations in wheat pricing heavily affected the United

States because it “supplies close to one fourth of world wheat exports” (Chand). The World Food

Price Crisis was sparked by droughts and rising oil prices. These two factors created late-2006

price spikes because the quantity of wheat available decreased due to poor farming conditions.

Additionally, rising oil prices raised the costs of fertilizers, wheat transportation, and industrial

agriculture. Thus, the supply of wheat was diminished by both natural disasters and rising input

costs. Increases in inputs and reduced quantities of wheat would shift the supply curve left and

create a new equilibrium point at a higher price. A higher price for a product or service typically

reduces demand. However, wheat demand is inelastic due to its integral place in food production.

Without wheat, many inexpensive foods cannot be made—since wheat is milled into an essential

ingredient—flour. Additionally, price increases in wheat translate to input cost increases in feeding

cattle and other livestock. Thus, price increases in wheat cause food prices overall to increase

because wheat is an integral food staple.

Rapidly increasing wheat prices internationally prompted many traders to speculate in the

wheat futures market. Traders believed that the increase in wheat prices caused by increases in
 Farlin 3

input costs and a decrease in quantity available would either continue to rise or plummet, which

led to an influx of open long or short positions. However, these unexpected market movements

“pushed up futures prices, disrupted convergence between futures and cash prices and increased

costs for farmers, the grain industry and consumers” (Doering). Increased speculation in the wheat

futures market limited options for farmers, who use wheat futures contracts to hedge against price

movements. Without the price safety net of wheat futures contracts, farmers were subject to the

abnormal price fluctuations created by the 2007-2008 World Food Crisis. Instead of locking in

guaranteed buyers and prices, farmers had to prepare for two possibilities: one, their wheat jumps

in price to the extent that there are no buyers; and two, their wheat decreases in price to the extent

that farmers cannot pay off their variable and fixed costs. Either outcome forces farmers to incur

heavy losses. Farmers who acquired short futures positions faced another issue: wheat futures

prices failed to converge with spot prices: “Chicago Board of Trade wheat futures and cash prices

at CBOT delivery points failed to ‘converge’, or come together during delivery periods, a process

essential for proper hedging” (Doering). If futures prices fail to converge with spot prices, then

wheat futures cannot serve their primary purpose to farmers: to hedge against volatile spot prices.

If the futures price is below the spot price at delivery, then farmers sell their wheat for less than

what they could have in the spot market immediately after harvest. In addition to the opportunity

cost of selling their wheat in the spot market, farmers also incur storage costs that would not be

covered by convergence. If farmers lose faith in the ability for CBOT wheat futures to converge to

reasonable cash prices in the spot market, then they may forgo all futures ventures. This

increasingly realistic possibility is especially dangerous because it would amplify the pre-existing

wheat shortage. If farmers sell their wheat for more profitable spot prices instead of storing it for
 Farlin 4

futures delivery, then the United States and its trading partners will experience a volatile wheat

price cycle—where wheat prices rise over the harvest cycle because most farmers immediately sell

their wheat on the spot market instead of incurring storage costs to sell their wheat at the locked-in

lesser futures price at delivery.

The Senate Permanent Subcommittee on Investigations investigated the wheat futures

market failure, and one key takeaway is that “there was ‘substantial and persuasive evidence’

showing that by purchasing so many contracts, index traders boosted demand, increased the gap

between futures and cash prices and made it difficult for prices to converge when futures contracts

expired” (Doering). Increased wheat futures speculation by index traders created “false demand”. I

define “false demand” as an appearance of increased demand that encourages suppliers and

producers to increase their supply of that good in the belief that they can sell all of their increased

inventory to capture additional profit—or at least enough revenue to settle costs. Demand created

by wheat futures speculation is “false demand” because few traders seek to accept delivery of

wheat. However, suppliers will only see that demand is increasing for wheat. Thus, suppliers will

incur unusually high production costs—with respect to rising oil prices, volatile markets, and

extreme weather predictions—with the expectation of at least covering expenses. Instead,

suppliers are left with excess supply of wheat—with the profit of selling wheat heavily reliant on

excessively volatile wheat prices. Thus, spot prices and future prices failed to converge to at least

break-even amounts for farmers—which caused them to incur heavy losses. Typically, an increase

in a wheat spot price at a specific point in time is offset by a loss in wheat futures, and a decrease

in wheat spot prices is offset by a gain in wheat futures. In this case, the market failure for wheat
 Farlin 5

futures and spot prices to converge caused farmers to incur losses in both futures and cash

markets.

Therefore, the volatile wheat futures market combined with “false demand” financially

crippled farmers at a time where an international food crisis was already forcing farmers to

maximize production. Unsurprisingly, clamoring for better wheat speculation oversight was

international, as “finance ministers from the Group of Eight nations -- Canada, France, Germany,

Italy, Japan, Russia, Britain and the United States -- said at their recent meeting that volatile

commodity prices put their economies, which have shown growing signs of heading toward

recovery, at risk” (Doering). The concern raised by leading economic nations signifies the

importance of wheat. All of the technological advancements in the world mean nothing for a

nation if they cannot feed their populations, and the fact that one product and one overall futures

market can significantly impact relatively stable powerhouse national economies on an

international level is simply astounding. The 2007-2008 World Food Price Crises reveals that the

wheat futures market is a double-edged sword—as futures prices can harm hedgers as much as

they can help them offset losses.

The second key contemporary event is the 2010-2012 World Food Price Crisis when

“many food commodity prices [by February 2011] had climbed above 2008 peaks” (Trostle). Two

food crises in a five-year span are especially damaging to futures markets and wheat farmers, who

had little time to recover from the 2007-2008 World Food Price Crisis before experiencing the

volatile rising prices of the 2010-2012 World Food Price Crisis. In 2012, “failing harvests in the

US, Ukraine and other countries…ha[d] eroded reserves to their lowest level since 1974” (Vidal)

and threatened the stable prices expected by wheat farmers and wheat futures traders throughout
 Farlin 6

wheat harvest cycles. The dangers of depleted wheat reserves can be analyzed via simple supply

and demand analysis. Demand for wheat is arguably inelastic. Supply for wheat is largely inelastic

because it takes months to grow and harvest—which means that supply is slow to adapt to abrupt

price and demand shifts. Additionally, wheat reserves reach their lowest level and highest price

before the next wheat harvest for three reasons. First, wheat demand is arguably continuous, which

means that wheat is constantly pulled out of reserves to meet demand. Second, farmers attempt to

capitalize on higher prices to cover storage costs and reap profits before prices drop after the

harvest. Third, the prices are highest before harvest because there is the smallest quantity of wheat

available. Thus, farmers rely on a consistent harvest cycle to sell wheat at locked-in futures prices

to cover costs. However, wheat takes approximately four months to mature and be ready for

harvest. Thus, this second food shock cannot be quickly resolved by increasing production due to

the long time interval that it takes to plant and prepare greater quantities of wheat. Additionally,

farmers are typically forced to grow specific amounts of certain types of crops by the government

to keep relatively consistent prices—as an influx of wheat would devalue the crops and reduce

profit yields. This subsidization process ensures that farmers are compensated for not operating at

full capacity for certain types of grain, fruit, and vegetables. The disadvantage of subsidization

arose during this food crisis for two reasons. First, governments are slow to react to economic

events, and farmers are prohibited from growing more than a specified amount of wheat until

Congress passes new legislation changing the amounts. Second, it will still take months for

farmers to prepare the unused land and grow the required amount of crops. Therefore, price shocks

are especially dangerous to wheat farmers because they are unable to adapt and react swiftly.

Additionally, “Prices of main food crops such as wheat and maize are now close to those that
 Farlin 7

sparked riots in 25 countries in 2008” (Vidal), which means that wheat futures prices approached

the astronomically high wheat futures prices experienced in the 2007-2008 World Food Price

Crisis. The volatility of the wheat futures market could theoretically be lessened by the futures

market of the other major grain: maize/corn. However, the United States held “in reserve a

historically low 6.5% of the maize that it expects to consume in the next year” (Vidal) which

eliminates a key wheat substitute and further endangers the stability of developing countries—who

heavily rely on wheat and maize imports from The United States, Russia, and Ukraine. This

combination of rising wheat and maize prices—and consequently the increase in wheat and maize

futures prices—is a deadly combination for farmers. Wheat and maize are common substitutes,

which means that cattle farmers could use maize instead of wheat to feed their cattle. Also,

companies could substitute maize-based flour into their products when wheat prices threaten to

significantly increase expenses. However, both products had reached absurdly high prices, which

disrupted the international food supply chain.

I purport that data analysis condenses the multitude of factors that have affected the price

of wheat futures over the discussed 6-year period and emphasizes the severity of the price

fluctuations. Table 1 below displays the price changes of wheat futures from 2006 to 2014.
 Farlin 8

Table 1 reveals that the price of wheat futures increased by 124.33% with respect to 2005 prices

from 2006-2007. Although the wheat futures prices decreased by 42.33% by 2009, the net price

increase of wheat futures is a staggering 82% with respect to 2005 prices. Thus, farmers were

already faced with prices that increased by a net 82% in a span of four years before 2010, where

wheat futures prices rose by 46.68%.

The final two key contemporary events are the 2022 Food Crisis and the COVID-19

Pandemic (2020-2023). The 2022 Food Crisis differs from the 2007-2008 World Food Price Crisis

and the 2010-2012 World Food Price Crisis because it results from war rather than natural

disasters. The 2022 Food Crisis is a direct result of the Russo-Ukrainian War, where Russia (1st)

and Ukraine (5th) constitute 23.92% and 8.91% of all global wheat exports respectively (Cook).

The Russo-Ukrainian War severely diminished wheat exports from Russia and stalled wheat

exports from Ukraine. The decrease in wheat exports from Russia and Ukraine “imperils food

security in lower- and middle-income countries in North Africa and the Middle East, the

Mediterranean, sub-Saharan Africa, South Asia and throughout Southeast Asia” because they rely

on imported wheat to both avoid famine and to stabilize their economy. The diminished wheat

exports from two of the five highest wheat-exporting nations had “rais[ed] wheat futures at a

near-linear rate to their highest levels since 2012” (Bentley). As of June 2023, the

Russo-Ukrainian War shows no signs of concluding, which means that many developing countries

are at an ever increasing risk of famine. In addition to the Russo-Ukrainian War, the 2022-2023

Food Crisis was heavily affected by abnormal climate phenomena. Wheat is “one of the crops

most susceptible to the effects of climate change” (Zhang), and increasing temperatures have

caused wheat harvests to produce smaller yields. Additionally, “rising populations in various parts
 Farlin 9

of the world combined with strong economic growth increase the demand for both milling-quality

and feed wheat” (USDA) which further stresses wheat supply. Thus, decreasing wheat exports

from major wheat exporting nations coupled with rapid population growth has crippled many

developing nations. It is difficult for developing nations to attract investment capital without stable

governments, but the immediate need for a developing nation is a steady food source. Without

food, developing nations cannot build societies and systems of government. Without a stable

government, developing nations cannot attract capital and investors to bolster domestic wheat

production. Without domestic wheat production, wheat farmers cannot hedge their wheat crops

against spot price volatility in the wheat futures market.

It has been difficult for other nations to marshal relief efforts for developing nations

because they are still recovering from the food shortages caused by the COVID-19 pandemic. The

COVID-19 pandemic raised wheat futures prices by disrupting international supply chains due to

the strict isolation and “stay at home” protocols enacted by many nations to “slow the spread”.

These nations faced a difficult dilemma: do they lift safety protocols for farmers to lessen the

effects of reduced supply, or do they keep COVID protocols and allow the wheat supply shock to

worsen over time? U.S. wheat futures prices rapidly rose following increased demand from China

and other developing nations—and the demand only increased following the decrease in Russian

and Ukrainian wheat exports due to the Russo-Ukrainian War. Therefore, the 2022-2023 Food

Crisis was the consequence of multiple factors, which include: population growth; climate change,

COVID-19 supply chain disruptions, and the Russo-Ukrainian War.

Understanding the wheat futures market and how it reacts to economic events is essential

because “price increases ripple from grain crops to other farm products that depend on grains, and
 Farlin 10

down the production line, diminishing in amplitude at each stage of production” (Kroeger). Thus,

wheat is a pivotal product because it is an input to a variety of products that are in constantly high

demand. Since the primary usage of wheat is to create food products, “food inflation can outpace

inflation for other goods for both producer prices and consumer prices” (Kroeger). Thus, it is

possible for nations to anticipate potential recessions and price fluctuations by monitoring

anomalies in wheat prices. However, it is impossible to accurately predict wheat futures prices due

to a limitless number of factors that a regression model would have to include. For example,

neither the COVID-19 pandemic nor the Russo-Ukrainian War were predictable. However, signs

of the 2007-2008 World Food Price Crisis were seen in 2006 price-spikes in wheat due to droughts

and oil prices—but the magnitude of these signals were unknown. Although it is impossible to

predict the severity and duration of economic events, the wheat futures market stands as a

powerful indicator because all worldwide events are incorporated when wheat futures prices are

set and adjusted. The wheat futures market is especially important because shifts in wheat prices

reverberate across other markets and force entire nations to change fiscal, monetary, and foreign

policy to keep themselves afloat when another international economic event strains the global

integration of products and services—and an overreliance on exports can set developing nations

back years politically, socially, and economically. I purport that the best way that a developing

nation can lessen the effects of rising wheat and wheat futures prices is to increase domestic

production. By producing wheat domestically, nations can lessen the effects of diminishing

imports from key wheat exporters like Russia and Ukraine.

This report reveals that wheat futures markets play significant roles in the workings of the

international economy. The ability for wheat farmers to hedge their crops against price fluctuations
 Farlin 11

in domestic and international wheat futures markets is an invaluable tool that will lessen the

effects of economic events that destabilize wheat spot market prices. However, farmers in

developing nations are unable to access the electronic wheat futures market, which leaves them

much more susceptible to wheat price fluctuations than developed nations. Although we cannot

necessarily predict future wheat prices during economic recessions—which is signified by the fact

that each of the three food crises analyzed in this paper had drastically different international

economic outcomes despite being affected by the price movements of preceding food crises—the

wheat futures market is an invaluable tool that can has the potential to give developing nations a

reliable method to shield themselves from adverse wheat futures price movements and currency

exchange rate fluctuations. Lastly, I purport that the best way to analyze wheat futures price

movements is to combine the scholastic fields of technical analysis and fundamental analysis. By

combining reliable historical data with up-to-date present data and increasingly accurate future

price models, developing and developed nations alike can: bolster domestic production; increase

hedging in wheat futures prices; and increase wheat storage capacities so that sudden, unexpected

economic events do not create disproportionately damaging economic shockwaves.

 Farlin 12

Works Cited

“Wheat Prices - 40 Year Historical Chart”. Macrotrends.net.

https://www.macrotrends.net/2534/wheat-prices-historical-chart-data. Accessed 27 June

2023.

“2007-2008 World Food Price Crisis”. EN.Wikipedia.org.

https://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisis. Accessed

27 June 2023.

Bentley, Alison R., et al. “Near- To Long-Term Measures To Stabilize Global Wheat Supplies And

Food Security”. Nature.com. https://www.nature.com/articles/s43016-022-00559-y.

Published 19 July 2022. Accessed 27 June 2023.

Cook, Rob. “Top 20 Largest Wheat Exporters in the World”. Beef2Live.com.

https://beef2live.com/story-top-20-largest-wheat-exporters-world-0-206491. Published 27

June 2023. Accessed 27 June 2023.

Chand, Ramesh. “Wheat Import and Price Outlook for 2007-08: Separating the Grain from the

Chaff”. Jstor.org. https://www.jstor.org/stable/4419862. Published 10 August 2007.

Accessed 27 June 2023.

Doering, Christopher. “Excessive Speculation Found In Wheat: U.S. Senate”. Reuters.com.

https://www.reuters.com/article/idINIndia-40558120090624. Published 23 June 2009.

Accessed 27 June 2023.

Janzen, Joseph P., et al. “Deconstructing Wheat Price Spikes: A Model of Supply and Demand,

Financial Speculation, and Commodity Price Comovement”. ERS.USDA.GOV.

 Farlin 13

https://www.ers.usda.gov/webdocs/publications/45199/46439_err165.pdf?v=0. Published

April 2014. Accessed 27 June 2023.

Kroeger, Teresa. “High Grain Prices Rippled Throughout The Economy”. BLS.GOV.

https://www.bls.gov/opub/btn/volume-12/high-grain-prices-rippled-throughout-the-econom

y.htm. Published 05 April 2023. Accessed 27 June 2023.

Sowell, Andrew and Swearingen, Bryn. “Wheat Sector At A Glance”. ERS.USDA.GOV.

https://www.ers.usda.gov/topics/crops/wheat/wheat-sector-at-a-glance/#:~:text=Rising%20

populations%20in%20various%20parts,milling%2Dquality%20and%20feed%20wheat.

Updated 05 May 2023. Accessed 27 June 2023.

Trostle, Ronald. “Why Another Food Commodity Price Spike?”. ERS.USDA.GOV.

https://www.ers.usda.gov/amber-waves/2011/september/commodity-price-spike/.

Published 01 September 2011. Accessed 27 June 2023.

Vidal, John. “UN Warns of Looming Worldwide Food Crisis In 2013”. TheGuardian.com.

https://www.theguardian.com/global-development/2012/oct/14/un-global-food-crisis-warni

ng. Published 13 October 2012. Accessed 27 June 2023.

Zhang, Huaquan, et al. “Measuring the Effects of Climate Change on Wheat Production: Evidence

from Northern China”. National Library of Medicine.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9565046/#:~:text=Wheat%20may%20be

%20one%20of,on%20crop%20production%20is%20profound. Published 28 September

2022. Accessed 27 June 2023.