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WMR -The Great Unknown, with Great Potential

By: Jim Peterson
Posted: Apr 08 2022

he world wheat export landscape changed dramatically in late February and early March, with the threat and eventual invasion of Ukraine by Russia.  World wheat markets responded dramatically initially, but have since settled back as buyers and sellers sort through the various scenarios that could play out in the near term and into the next crop year.

The accompanying chart illustrates the share of world wheat exports by major countries/regions over the past three years.  Russia, Ukraine and Kazakhstan collectively account for nearly one-third of wheat trade and concern over the total loss of exports from Ukraine and a dramatically diminished role from Russian wheat as an export source quickly excited the world wheat market.  Adding to buyer concern is the sharply lower exportable supplies from Canada and the U.S. this year due to drought, and even though EU and combined Argentine and Australian export supplies are up from last year, a large share is already committed.

Ukraine had been projected to export close to 24 million metric tons, or 880 million bushels in earlier USDA projections, but has since been rolled back to 20 MMT (735 mb) in the March projection.  Obviously, some export shipments have already taken place, but a great unknown exists for the upcoming months.  

Russia had been limiting its exports already via an export tax to try and control domestic food inflation.  Earlier USDA projections had been at 36 MMT (1.3 billion bushels), but were lowered in March to 32 MMT (1.2 bb).  Russia may try to aggressively export in the near term to avoid potential further sanctions or to generate currency.   How effective they will be in capturing sales is uncertain, as many countries have committed to avoiding Russian wheat, either due to government positions against Russia for the invasion, or for the extreme risk it carries in the buyer actually receiving delivery. Damage to port facilities, and the pull out of multinational companies handling grain in Black Sea ports is an ever evolving situation.  In addition, Russian is posturing to require payment in Rubles, which could quickly curtail any future sales.

Black Sea wheat has been particularly dominant in African and Middle East regions of the world.  Collectively this region has accounted for 1.7 billion bushels of imports in the past two years, but is projected to need 1.9 billion bushels in the current marketing year due to droughts in the Middle East region.   That is a significant level of wheat that may need to be replaced by other origins if the worst case scenarios play out with regard to the invasion and the ability of Ukraine to produce a crop, and Russia to market theirs through Black Sea ports. 

The majority of the wheat planted in Ukraine is winter wheat, but there is a lot of unknowns regarding the potential management and eventual harvest of that crop going into spring and early summer.  Any estimates that come forward are highly speculative, as there is simply too much unknown with respect to the ability for farmers to access land, attain fuel and inputs, navigate roads, and find labor.  With the need for Ukraine to keep as much domestic supply as possible to meet near term humanitarian needs in country, it is highly likely there may also be constraints put on exports. This has some analysts taking Ukraine totally out of the export picture for the upcoming year. If that scenario plays out, then there is potential for roughly 20 MMT (750 mb) of exports that would have to come from other sources, just to replace supplies from Ukraine. Russian supplies may also be curtailed sharply, either due to internal production constraints, domestic food inflation, and the avoidance of Russian origin by many world buyers.  

The EU will likely be the first option, just based on proximity to the Middle East and African markets, and the type and protein of wheat produced.  U.S. hard red winter and soft red winter wheat would likely be the next most viable option, followed by Argentine and Australian wheat as their harvest gets into marketable position in the latter part of 2022 and early 2023.  India is also looked at as a potential near term option for buyers, with USDA currently projecting 8.5 MMT (305 mb) in exports for India, up from recent levels of 1.5 MMT (55 mb). 

As shown in the accompanying chart with U.S. wheat futures price trends, the initial market concern over potential scenarios, clearly illustrates the level of uncertainty that drove speculation in futures.  Both Chicago and Kansas City markets jumped by $3.50 to $4 per bushel.  The values in the chart are averages for a month. The actual high for Chicago wheat exceeded $13 per bushel, Kansas City hit $13, and Minneapolis exceeded $12 per bushel.  Values have since settled back in both markets, and Minneapolis has once again moved back to a premium.

This is not the end of the uncertain price path that world wheat values will take in the coming months and year.  There is still a lot of unknowns, but great potential exists for both greater export opportunities for U.S. producers, and at higher values.  Conversely, unforeseen government actions to control price movements, or an end to the conflict could deflate prices.  A lot will depend on if and when key world wheat buyers decide to proactively shift their buying patterns away from Black Sea sources.  That has not happened as of yet, at least on a large scale level.  Many are likely waiting for a little more stability in world wheat values, and hoping for a quick resolution to the conflict.  For both producers and buyers, there is probably no easy strategy this year for determining the right value for wheat due to the enormous risk and uncertainty the Russian invasion has brought to world wheat trade.

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