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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 a renewed pickup in 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. 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.
Given wheat’s role as a global staple crop, that will only stoke concerns about food inflation fears that 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. Rising input costs were already seen curtailing 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.
The April consumer price index, meanwhile, rose 0.6% from March, putting the year-over-year pace at 3.8%, up from 3.3% a year ago. 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 seeking an inflation play. See: The tailwind grains have been waiting for? These signals just flashed green.
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 farm.”
That said, despite Tuesday’s data showing a surprise tightening of U.S. wheat supplies, relatively ample crop supplies have been seen 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.
‘Proxy bet’ on gasoline: So far, much of the hedge-fund positioning in ag commodities has appeared to focus more on a surge in demand for biofuels as a result of the steep runup in oil and fuel prices. Soybean oil, in particular, has surged around 55% year to date.
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, soyabean 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.
Trump-Xi to talk corn? Chinese officials are in discussion with their U.S. counterparts about buying U.S. crops, including corn, and could reach a deal during President Donald Trump’s visit to China this week, Bloomberg reported. Market attention has focused largely on soybeans and hopes that Beijing will affirm what the Trump administration has said is a commitment to buy 25 million metric tons a year for the next three calendar years.
But reports have also highlighted the potential for wider agricultural purchases by China. The Bloomberg report said China could take U.S. corn, as well as products including sorghum and distillers dried grains. Soybeans are also part of the discussion, the report said, citing traders briefed on the matter.
Consumer squeeze: With concerns about affordability running high, pressure on cattle futures Tuesday may also be partly attributable to data that showed inflation surpassed wage gains for American workers in April. Beef demand has proven stubbornly resilient as prices have risen. But a squeeze on pocketbooks – or real spending power – is seen carrying the potential to drive a more meaningful shift away to substitutes as well as cheaper cuts.
- The Labor Department said April marked the first time inflation surpassed year-over-year growth in average hourly earnings since April 2023. Hourly wages were up 3.6% year over year, while the headline inflation rate rose 3.8%.
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