David Roche sees grain prices rising, contrary to market consensus

Grain prices have been in freefall of late as investors bet on a resurgence of supply from the U.S., Russia and Ukraine — but veteran strategist David Roche disagrees.

Contrary to market consensus, Roche, president and global strategist at Independent Strategy, expects a 13-15% annual increase in wheat prices over the next two years.

“The logic is simple. Further disruptions by Russia and of Russia’s own important grain supplies are a major risk, we have climate warming as a generality which we can see is cutting the water levels in crucial arteries like the Mississippi, which carries 60% of U.S. grain to ports where it can be shipped abroad, so we can have all sorts of disruptions we haven’t imagined from climate change,” he told CNBC’s “Squawk Box Europe” on Monday.

“And then on top of that we’ve got El Nino, where the evidence of crops being affected is now starting to become very clear.”

His comments come as wheat prices remain down around 29% year-to-date and at their lowest levels since September 2020, with short positions — bets that prices will fall — recently hitting a three-month high, according to a report from Independent Strategy. Corn prices are also trading around three-year lows while soybeans recently notched a four-year low.

The price falls were heightened by the U.S. Department of Agriculture reporting higher production and stockpiles than analysts had expected. The data compounded downward price pressures coming from signs that Ukraine, a key grain producer, is managing to find alternative export routes despite Russian attacks on its ports.

Ukraine’s deputy prime minister said Sunday that five more ships were en route to Ukrainian sea ports via a new corridor opened primarily for agricultural exports, an alternative to the Black Sea grain deal blocked by Russia in July.

Meanwhile Russia, the world’s largest grain exporter, has also produced large harvests which analysts expect to get through export blockades.

However, Roche says there are additional factors that could push prices higher.

For example, a critical stretch of the lower Mississippi River fell last week to within inches of its lowest-ever level, according to the U.S. National Weather Services, and is expected to remain low as the country prepares for its busiest season for grain exports.

This, along with Russian volatility and El Nino, are “three factors which I think will disrupt the supply side” of grain markets, Roche said.

“And the demand side is driven by how many people there are in the world and that goes up all the time and countries just can’t afford it,” added Roche, who is known for correctly predicting the Asian Financial Crisis in 1997 and the 2008 Global Financial Crisis.

“So we’re looking at food security as a major demand-side factor as well. I may have to wait a year, maybe three years, to get returns on these grains, but I’m prepared to sit it out.

Independent Strategy expects crop yields to suffer from higher global temperatures and the El Nino weather pattern, which typically lasts around four years, and assumes that global grain supply will be constrained by the Russia-Ukraine war persisting into 2024 and possibly even 2025.

The cumulative effects of these meteorological and geopolitical risks will see the stock-to-usage ratio for wheat fall by around 5% per year until the end of 2025, according to Roche, leading to a 13-15% annual increase in wheat prices.