Wheat Prices Rise Amid Drought, Ukraine Tension
NEW YORK ( MainStreet) Poor weather conditions and tensions in Ukraine are sending wheat prices higher.
The consumer staple rose 2.3% in April, currently trading at $7.0875 per bushel for July delivery on the Chicago Board of Trade.
In the United States, a drought in Kansas, Texas and Oklahoma, the three largest wheat producing states, led to a dwindling crop supply, causing wheat prices to rise.
According to a report released earlier this week from the U.S. Department of Agriculture, 65% of wheat in Texas and Kansas is rated as poor and very poor.
"The Southern Plains has been a peninsula of dryness and the U.S. has produced 20% less wheat compared to a year ago," said Jason Ward, director of grains and energy at Northstar Commodity.
Aside from the drought, geopolitical tensions in Ukraine are fueling the wheat rally , as Ukraine is the world's fifth-largest exporter of wheat.
"What's happening in Ukraine is perceived concerns over less wheat getting exported out of the country, which on paper has not materialized," Ward adds.
Still, the situation in Ukraine remains fluid and uncertain. The futures market accounts for such factors and is adding risk premium in current wheat prices over fears that conflicts in Ukraine could escalate to a level that would impact the amount of wheat the country exports.
The rise in wheat prices comes at an inconvenient time for consumers, when other breakfast staples such as coffee and orange juice are edging higher, also due to drought conditions in the regions that produce such crops.
While prices of wheat are rising in the futures market, consumers won't feel the pinch at the stores immediately. "The product manufacturers are making now is from a previous harvest at a lower price," Ward said. "Crops will be harvested in June, so the impact of the current rise in prices will be felt by consumers during the fourth quarter of this year."
A rise in wheat prices will impact the consumer's bottom line, beyond simply the bread staple. Pasta, noodles, breakfast cereal, cookies, cake and even beer are at risk for price jumps, too. Meat prices are also expected to surge, as wheat is a vital source of food for cattle and livestock.
"Wheat prices in the futures market have risen 33% since early February, so consumers should notice at least a 25% increase in prices," Ward tells MainStreet. "Though sometimes companies will pass along the entire commodity price increase to consumers, pushing the increase closer to 33%."
If companies don't raise prices, Ward says consumers should brace for smaller sized items on store shelves, as the higher costs will eventually start to impact manufacturer's bottom line.