Wheat’s Dilemma: Bumper Harvests Meet Waning Demand

February 09, 2015


Russian Wild Card

But there is also that all-manmade factor—politics. This is currently very much the case when it comes to Russia and Ukraine—the Black Sea region. A factor of concern early in the season may well have been continuing dry conditions in Russia; now, however, it is also geopolitics and the possible effects of sanctions on those country’s domestic food supplies.

As the value of the ruble has plummeted, wheat has been exported at a record pace, abruptly forcing up domestic prices. In a vain attempt to slow this flow of grain out of the country, the government tried limiting railcar loadings, imposing sanitary and phytosanitary standards, increasing the intervention price and, finally, most recently, clamping down with a wheat export duty that was due to become effective Feb. 1, 2015, and lasting to the end of June.

However, as the USDA described it: “The global impact on trade is expected to be minimal because other exporter supplies are abundant … Russia’s major export markets are in the Middle East and North Africa. With competitive prices, plentiful supplies, and proximity to major markets, the EU and Ukraine are in the best position to take advantage, although other exporters may also benefit.”

But are things that hunky dory for Ukraine? It can still get its exports out of the country, but for how long? And as U.S. Wheat Associates point out, the country’s farmers are facing an uphill battle to secure financing for their operations.

Elsewhere in the world, Argentinian wheat farmers are also facing uncertain times, with a number of questions regarding export licenses and the country’s somewhat-unstable financial situation—both, to differing degrees, under human control.


Where Do Wheat Prices Go From Here?

U.S. Weekly FOB Export Bids

Source: USDA

Note: HRS=Hard Red Spring, HRW=Hard Red Winter, SRW=Soft Red Winter and SWW=Soft White Winter

In addition to high year-end inventories, the strength of the U.S. dollar has certainly not been helping wheat farmers, not least because wheat is very price sensitive, and wheat exports are sensitive to exchange rates.

Going forward, demand for feed for domestic livestock and for U.S. wheat exports is expected to be limited. And indeed, there is little expectation in the market that global demand through 2015 will increase dramatically. Trade is also expected to decrease.

On the supply side, how events unfurl in the Black Sea region (where drought is occurring, and temperatures—especially in Russia and Ukraine—have been unfavorably cold) will be important.

The situation in Australia could also be important (with unfavorably warm temperatures), where a dropping yield potential was causing some concern toward the end of 2014 and early 2015. There have also been some worries expressed about the quality of Canadian as well as French wheat.

All that said, the USDA is still projecting global production for 2014/15 to set a new record. And vis-à-vis Russia, it’s likely to be the EU and perhaps Ukraine that will take advantage of any export opportunities that may arise.

These worries and concerns aside, in the face of abundant supply, and demand growing only incrementally, the price of the grain could reach new low levels.

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