Commentary

Rural Voice August 2018

The wheat market rallied sharply as we progressed through July and into the month of August.  The news headlines have been full of wheat production issues throughout many countries around the world.  First of all, and of utmost concern, has been the state of the Russian crop.  Russia has developed into the biggest wheat exporter and low cost supplier in the world marketplace, so understandably when they cannot export grain; buyers are forced to buy wheat from higher price origins.  The Russian crop is forecast to fall sharply this season, from last year’s massive production.  Russian wheat production in the 2017 crop year was 85 million metric tonnes.  Due to the drought conditions experienced this growing season, their wheat crop is estimated to fall substantially to 68 million metric tonnes.  While this drop is dramatic (a 20% decrease) total Russian wheat production is still large compared to the 5 year production average.  Headline reports about Russia keep the market jumpy and prices have been quite volatile.  Recently there were reports that the Russian agriculture minister would limit all grain exports this season to ensure sufficient domestic supplies.  This headline report rallied the market immediately and sharply, then quickly faded away as the same minister stated that this rumor was not true.  Again the Russian minister made further announcements.  He raised the estimate for total Russian grain production from 100 million metric tonnes to about 105 million metric tonnes.  At the same time he emphasised the point that Russia will have significant volumes to ship this crop year and that they will continue to service the customers that they have developed over the past years.  It wasn’t long ago that Russia put an export ban due to poor production.  In 2010 Russia issued a total grain export ban and in 2015 they put informal interventionist policies in place to make exports difficult.  When asked if they would enact similar policies this year the Russian ag minister stated that, when it comes to choosing between meeting food security or curbing exports, they will be choosing exports limits again and again. 

Given the state of the Russian crop and the uncertainty of Russian government policy, how then are market participants reacting?  Well, Russian traders are feverously exporting wheat as rapidly as possible, trying to capture market prices while they can.  From July 1st to Aug 15th it is reported that Russia exported 6.8 million tonnes of total grain, up 46% compared to the same time last year.  In the nearby marketplace they are finding willing buyers.  Into the deferred period however buyers are more leery about Russian performance.  It is reported that buyers are paying more for European wheat to ensure shipments as they are concerned that Russian default is highly possible into the New Year. 

Europe too, does not have as much to sell this crop year, compared to last season.  Severe drought has impacted yields in France, Germany, the UK and other countries.  Total EU wheat is forecast to fall from about 152 million tonnes to about 137 million tonnes, down about 10%.  Germany has released estimates showing its production down 22% year over year.  Therefore some market participants believe that if Europe cannot meet world buyer requirements they must turn to other countries to supply the need.  Australia and Western Canada are large world exporters however they too have supply concerns.  Australia has seen severe drought, and their crop is estimated to fall from current estimates of 22 million tonnes to 18 million tonnes by some analysts.  This puts estimates for Australian exports down by an equivalent amount, down by 4 million tonnes. 

It is because of all of these production issues that speculators have been aggressively buying US wheat futures.  The rationale behind this action is that world buyers will be forced to purchase US wheat as there will be no other alternatives, because of the reduction in world supplies.  How aggressive have speculators been?  They are the longest they have been since the historic US drought in 2012.  So how have US wheat sales been given the outlook and run up in prices that we have seen?  The US has seen the worst 1st quarter sales on record.   The explanation for this is simple:  US wheat prices are simply too high.  It was recently reported that Russian wheat can be sold into Mexico at $20/tonne cheaper than US Hard Red Winter can be delivered for.  US wheat prices have risen on the anticipation of a lot world business, business that has been scared away because of high prices.  For US wheat futures to hold such prices they will have to start exporting more wheat into the world market place.  There are those who are convinced this will happen, it’s all a matter of time they say.  Currently market speculators have put a lot of money into the wheat market with these things in mind.  The market has started fading lower.  Will these speculators be patient and hold onto these positions if they begin losing money?  We will find out how patient these wheat longs are – but at the end of the day prices need to drop if no one wants your product.