Wheat’s Dilemma: Bumper Harvests Meet Waning Demand

February 09, 2015

Lower prices for wheat appear to be in the cards when assessing the demand and supply equation.

 

Harvests may have been at record levels recently, but the production of, and trade in, wheat is still subject to exogenous factors. Some may be under human control, others may not.

Behind hay, wheat is the fourth-biggest U.S. crop; corn and soybeans are Nos. 1 and 2, respectively. In fact, wheat covers more of the earth than any other crop.

 

US Planted Crop Areas

Source: U.S. Wheat Associates (from USDA data – Crop Acreage Report: 6/30/14)

 

 

While historically the U.S. may, on average, have produced only around 10 percent of the world’s wheat, according to the U.S. Department of Agriculture, it has consistently been the world’s biggest wheat exporter.

The world’s other large wheat exports are Canada, Australia, the EU-27, Russia, Ukraine, Kazakhstan (often referred to as “Black Sea”) and Argentina. Typically, these account for around 90 percent of the global wheat exports.

The world’s 10 major wheat importers are:

  • Egypt
  • Indonesia
  • Algeria
  • Brazil
  • Japan
  • Iran
  • Turkey
  • EU-27
  • Nigeria
  • Mexico

 

According to the USDA FAS export sales report of Jan. 8, 2015, year-to-date, the top 10 customers for U.S. wheat are:

  • Japan
  • Mexico
  • Nigeria
  • The Philippines
  • Brazil
  • Korea
  • Taiwan
  • EU
  • Colombia
  • Italy

 

On Jan. 12, the USDA published the Foreign Agricultural Service (FAS) updates to its production, supply and distribution database and released its World Agricultural Supply and Demand Estimates (WASDE) report.

 

 

According to the WASDE report, in the year 2014/2015, global wheat production is forecast to hit a record of 723 million metric tons (“MMT”). This follows a record year in 2013-14, when production hit 715 MMT. Global supplies are projected to reach a record 909 MMT, up 19.4 MMT from 2013-14. On the other side of the coin, consumption is projected to set a new record of 713 MMT.

 

Global Wheat Production, Use and Trade

Source: U.S. Wheat Associates (from USDA data)

 

Over the 2014-15 period, not only did U.S. production fall an estimated 5 percent to 55.1 MMT., U.S. exports were also expected to decline some 21 percent to 25.2 MMT. Export numbers have declined not least because the last two years have seen large production numbers from other wheat-growing countries.

 

US Wheat Area and Production

Source: U.S. Wheat Associates (from USDA data)

 

Some Exogenous Factors

On the production side, there is always, above all, the weather; in the short term, arguably, not under human control. According to U.S. Wheat Associates, extreme weather issues in the Northern Hemisphere adversely affected this season’s crop quality.

While on the one hand, in the U.S., acres harvested for hard and soft red winter wheat were reduced because of severe drought conditions, on the other hand, hard red spring wheat and northern durum were affected by wet weather, which not only slowed early planting and harvest, but affected durum color and limited protein.

Excessive rains late season in Canada resulted in the same low protein levels in spring wheat and “poor durum color,” and, over harvest time, lead to poor-quality crops from France and Ukraine.

 

 

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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