Food inflation fears are back on Wall Street’s radar after USDA on Tuesday slashed its U.S. wheat production estimate shortly after the April consumer price index showed inflation running at a three-year high, driven by a combination of surging energy costs and higher grocery prices.
With drought taking a toll on the crop in the Plains, USDA pegged all wheat production at 1.561 billion bushels, well below the average estimate of 1.747 billion bushels and down from 1.985 billion bushels last year for the smallest crop since 1972. That sent July and September hard red winter wheat futures up the 45-cent daily limit in Kansas City, along with July soft red winter wheat in Chicago.
“The market response reflected the growing recognition that wheat carries a more direct food-security implication than several other agricultural commodities, particularly given its importance in global staple food production alongside rice,” said Ole Hansen, head of commodity strategy at Saxo Bank, in a Wednesday morning note.
Food shortage fears have been building since the start of the Iran war, which has closed the Strait of Hormuz, choking off crude oil flows and fertilizer shipments from the Persian Gulf, but are seen as more of a 2027 story for grain markets amid relatively ample stockpiles. Rising input costs have been expected to curtail planting of wheat in Australia and elsewhere. And that has appeared to lend support to inflows into agricultural commodities by hedge funds and other speculative players. USDA on Tuesday forecast world rice production to fall 5 million tons in 2026-27, the first decline since the 2015-16 marketing year, with the largest declines seen in India, Burma and the U.S.
Inflation at 3-year high
The April consumer price index, meanwhile, rose 0.6% from March, putting the year-over-year pace at 3.8%. Energy remains the primary driver, but food costs also jumped, rising 0.5% on the month and 3.2% year over year.
The Trump administration, meanwhile, is walking a tightrope over beef prices. News reports on Monday said the president was set to sign an executive order that would have effectively removed tariffs on beef imports in a bid to bring down prices. But the plan was shelved, the Wall Street Journal said, after objections from ranchers and farm-state lawmakers.
The CPI breakdown helps explain the White House’s seeming obsession with beef prices as it attempts to deal with both rising food and energy costs ahead of this fall’s midterm elections. The data showed beef and veal prices rose 2.7% in April, bringing the year-over-year rise to 14.8%. Ground beef prices rose 5.8% last month, pushing them up 14.5% from a year ago.
The administration’s focus on beef prices and the potential for some form of government action likely helps explain pressure on cattle futures Tuesday.
For grain and soy complex futures, the question is whether the shift in wheat supply and rising inflation concerns offer enough fuel for further gains given that speculative funds have already piled into the market. See: The tailwind grains have been waiting for? These signals just flashed green.
Hansen, citing the latest Commitment of Traders data covering the week ended May 5, said a 3.3% weekly rise in the Bloomberg Agriculture Index triggered an estimated $6.2 billion of net speculative buying across agriculture futures. The combined net long across 13 major agricultural futures contracts rose above one million contracts for the first time in four years, representing a nominal value of roughly $57 billion, he said. The strongest buying interest was concentrated in corn and the soy complex (see chart below), “reflecting both improving technical momentum and growing demand optimism linked to energy markets, while the combined net long across the six major Chicago-traded grains and soybean futures jumped to a record 847,000 contracts with the bulk concentrated in corn and the soy complex, Hansen wrote.
Peter Boockvar, chief investment officer of One Point BFG Wealth Partners and editor of the closely followed Boock Report, noted early Tuesday that the Bloomberg Agriculture Spot Index was trading just shy of its highest since 2023. He wrote: “As for the broad ag sector which also includes coffee and cocoa in addition to corn, wheat and soybeans among others…there is a lot of runway higher, a negative for the world that eats but positive for the farmers.”
That said, despite Tuesday’s data showing a surprise tightening of U.S. wheat supplies, relatively ample world supplies have been seen as blunting upside potential for grain markets. While input costs, including fuel and fertilizer, have soared in an echo of Russia’s 2022 invasion of Ukraine, grain futures have seen only a modest rise.
It’s also worth noting that speculative inflows into corn and the soy complex appear to have been driven largely by bullish bets on biofuel demand as a result of the surge in oil prices. Hansen noted that wheat positioning has been more nuanced than price action alone may suggest. CBOT SRW wheat futures recently flipped back into a net short position among managed money traders. He blamed an “elevated” carry structure, particularly in Chicago wheat, where abundant global feed wheat supplies contrast with tightening conditions in higher-quality milling wheat.
‘Proxy bet’ on gasoline
Hakan Kaya, a portfolio manager at Neuberger Berman, told the Financial Times that he is betting on agricultural commodities to position for potential gains in both biofuel prices and food prices. Kaya has reduced direct exposure to oil and gas because of the risk of sudden price swings triggered by military escalation or ceasefire negotiations.
“If you look at energy now, it is a binary bet whether we de-escalate or escalate further, it’s almost impossible to know,” he said. “But we know one thing: if energy prices stay high at the current levels, they will spill over to the rest of the agricultural space.”
Neuberger Berman has been building “proxy baskets” of agricultural commodities that could benefit from the shock to energy markets and inflation, including corn, soybean oil, canola and livestock, the report said. Kaya described corn as a “proxy bet on gasoline,” noting that vegetable oil prices are also increasingly tied to fuel markets.
“Looking ahead, weather developments across the northern hemisphere growing season will remain critical,” Hansen said. “The market will also continue monitoring whether elevated energy prices sustain strong biofuel demand for soybean oil and corn-based products. For now, the grain sector appears increasingly influenced by the same macro forces driving broader commodity markets, namely energy costs, geopolitical disruption, and tightening supply chains.”