Grains of Change: Climate’s Impact on Wheat Yield, Supply Chains, and Financial Markets
Climate volatility has recently disrupted many supply chains, and the agriculture and food industry is no exception. Not only has climate change caused shifts in production, manufacturing and consumption, evidence also points to its impact on the financial performance of companies. During the early Spring of 2024, the agriculture complex experienced severe price changes in major commodities like corn, wheat, cocoa, orange juice and coffee.
Here, we take a closer look at wheat!
AlphaGeo utilized global climate oscillations data to examine its impact on the US wheat yield and the financial performance of selective companies in the agriculture and food industry spanning the past nine years (2015–2023).
Wheat, a cornerstone of global sustenance, not only anchors the American agricultural landscape but it is an essential staple globally. Per USDA, 850 US counties grew wheat in 2022 (Fig 1). However, the number of counties cultivating wheat witnessed a consistent decline between 2015 and 2020, attributed to two primary factors (Fig 2). First, the US economy has continuously strived to shift from an agriculture/manufacturing economy to a service industry, that is until the Covid pandemic. Second is the changing climatic conditions. It is important to note that while the number of farms cultivating wheat has decreased, the average area under cultivation shows an increase.
Furthermore, amidst the onset of COVID-19 lockdowns and significant supply chain disruptions, we witnessed a 20% surge in counties involved in wheat production from 2019 to 2020. This was expected since the US relies heavily on wheat imports to manage their demand. As per the Open Education Consortium (OEC), in 2022 the four biggest economies exporting wheat to the US were Canada, France, Argentina, and Ukraine (Fig 3). The fastest growing import markets in wheat for the US between 2021 and 2022 were Canada ($314M), France ($7.61M), and Argentina ($7.43M). These supply chains are not surprising since both Covid and geopolitical factors have spurred a notable trend towards nearshoring, strengthening alliances, and enhancing domestic supply chains in international trade.
Every agricultural commodity has two markets, local and global, and climate conditions impact both. Our examination of global climate oscillations data alongside USDA yield records revealed a robust statistical relationship, with a 99% confidence interval indicating significance between climate features and wheat yield (bushels per acre).
Moreover, our overall Ordinary Least Squares (OLS) timeseries regression model exhibited remarkable explanatory power, nearing 90%, highlighting the growing influence of climate variables on wheat yield. This impact is not only confined to the US but extends globally, especially to the countries in the EU.
Warm Spring weather in Europe has caused early emergence from dormancy, making winter grain crops more vulnerable to damage from cold snaps and frost. Additionally, dry conditions in the U.S. Plains and Southern Russia are further complicating the outlook for global wheat production in the upcoming marketing year. These weather-related uncertainties have led to an uptick in U.S. wheat prices, with traders closely monitoring the situation for potential impacts on supply and demand dynamics (farmprogress.com).
While climate may be an obvious, though understated, indicator of variability in wheat yield (and overall agriculture production), our experiments also showed a statistical relationship between a few socio-economic features. A time series OLS model for wheat yield showed statistical significance with insurance, household debt, education, GINI index, employment, and to a certain extent with infrastructure (condition of bridges used as proxy). Furthermore, the model exhibited a respectable explanatory power, with an R-squared value of 0.635.
We believe that while at first glance these factors may not seem to be directly tied to agricultural production, they are indirectly related to and demonstrate correlations with variables related to farm management. Among these factors we can include the cost of chemical inputs such as crop protection and fertilizers, labor and transportation costs, and energy costs, all which impact grower margins.
The most interesting observation here is the house price income ratio. For every unit increase in the house price-to-income ratio, there is a corresponding significant increase of 3.55 units in the wheat yield. This suggests a strong relationship between the affordability of housing and wheat yield outcomes. Our results also show a strong relationship between wheat yield and HPI. Similarly, we see a strong negative relationship between the GINI index and wheat yield. For every unit increase in the GINI index (indicating greater income inequality), there is a significant decrease of 15.22 units in wheat yield. These correlations suggest that wheat agriculture may stand to be significantly more sustainable and profitable in regions characterized by greater economic prosperity.
Let us now look briefly at what is going on with the international wheat trade markets. Canada, one of the US’s major wheat importers and a close ally, shows a promising outlook for wheat exports, contingent on timely rains. While Canadian wheat exports are thriving, challenges persist in the durum market due to growing competition from countries like Turkey. However, given the US’s focus on nearshoring, the Canada and US wheat trade should not be affected, at least in the short run (AG News).
The recent downturn in Chicago Board of Trade (CBOT) wheat futures pushed them to the lowest levels since August 2020, marking a stark contrast to the bullish sentiment of two years ago during Russia’s invasion of Ukraine, which led to a major uncertainty in the wheat markets. However, Ukrainian wheat exports have remained resilient, with a 6% increase from last year. USDA projections anticipate a decline, potentially impacting US wheat prices. This situation underscores the vulnerability of the US wheat market to external factors and highlights the need for strategic adaptation in response to changing geopolitical landscapes (Reuters).
Finally, our team at AlphaGeo delved into examining how climate oscillations data could influence the financial performance of selective public limited companies, using the open share price as our dependent variable. Commodity prices do work their way into the public markets, impacting both the supply and demand side of the equation.
Although our time series OLS regression models hinted at the potential impact of climate on profitability (Fig 4), we observed a limited statistical correlation between various climate features and open share prices. Nevertheless, this observation does not warrant dismissal; rather, it highlights the importance of further exploration and consideration of these factors.
In conclusion, the interplay between climate change, supply chains, and financial markets is undeniably intricate and far-reaching. As evidenced by our analysis, the repercussions of climate variability extend beyond mere agricultural yield, affecting global trade dynamics and financial performance. The imperative now lies in strategic adaptation and holistic consideration of these multifaceted factors, as we navigate towards a more sustainable and resilient future for both the wheat industry and beyond.
Future experiments can focus on analyzing the intersection of climate and agriculture policy. We also need to focus on how shifting geopolitics impact agriculture markets, not just in terms of production but also its greater impact on financial markets. In terms of data, we need to look at how climate variables are impacting global production and identify the commonalities between economies. With ever increasing globalization and trade dependencies, a more collaborative approach is needed to tackle the growing concerns of climate change and food security.
