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In recent months, U.S. grain rail shipping has faced a host of service-related challenges ranging from delayed cars to metered traffic and dramatic spot freight market increases. Those service problems reached such elevated levels that the U.S. rail regulatory body, the Surface Transportation Board (STB), stepped in.

The STB will now require the four largest rail carriers to submit a host of documents and conduct biweekly check-ins with the agency until service levels are restored.

The U.S. wheat industry depends heavily on rail shipping to move the crop from farms and local elevators to domestic customers and to export elevators. And USDA reports that railroads ship 25% of all U.S. grains. That is why U.S. Wheat Associates (USW) and its Transportation Working Group have coordinated with other organizations to highlight the challenges rail shipping has faced.

New Requirements

The move by the STB shows the agency is taking rail shipping concerns seriously. Carriers now must develop service recovery plans and submit regular progress reports. The regulator will also require all Class I railroads to report on customer-centric performance metrics and employment data for a six-month period. According to their published decision, the STB’s actions are “to promote industry-wide transparency, accountability, and improvements in rail service.”

The challenges with rail service are clear. The American Farm Bureau Federation put together an extensive report showing the severity of the shipping disruptions. For example, in the year after the first quarter of 2021, unfilled grain car orders went up 47%. The number of grain cars that were at least 11 days overdue went up 107%. Rates in the secondary rail market increased, and rail delivery speeds declined during the same period.

Shuttle loading system to present rail rates background

A 110-car shuttle train is loaded with grain at an inland elevator. The U.S. wheat industry depends heavily on rail shipping to move the crop to domestic customers and export elevators.

Threats of Service Cuts

In mid-April, the Union Pacific (UP) Railroad announced that it would start metering traffic if shippers did not voluntarily reduce their freight-car inventories. In a statement, UP said it had “experienced some setbacks – including numerous service interruptions, crew shortages…and delays to our network.” UP added that “additional inventory has led to more congestion in yards, an imbalance of our resources, and further slowdown of our operational performance.”

In response, CF Industries, a major fertilizer producer, said such actions by the railroads would put crops at risk by curtailing fertilizer shipments ahead of the spring planting season.

Addressing the Negative Impact

In March 2022, the National Grain and Feed Association (NGFA) urged the Surface Transportation Board (STB) to address “significant rail service disruptions,” which have negatively impacted the nation’s supply chains. Following that letter, the STB was quick to react and scheduled public hearings held in late April. Those hearings featured shippers, rail labor unions and rail company executives.

The Agricultural Transportation Working Group (ATWG), a representative body made up of agriculture-oriented trade groups, including USW, sent a letter to the STB on April 21 and urged an immediate resolution to the “current nationwide freight rail service challenges.” The group urged the STB to take appropriate measures that would “deter, and hopefully prevent future service failures,” which include the establishment of reciprocal switching rules.

Additionally, USW filed joint comments to the STB hearing with the National Association of Wheat Growers (NAWG) and the North American Millers’ Association (NAMA). The USW Transportation Working Group, led by North Dakota Wheat Commission Policy and Marketing Director Jim Peterson, also met with each member of the STB to share concerns regarding the current railroad challenges and to point out the benefits that competition-inducing policies provide, such as reciprocal switching.

A Welcome Sign

The orders issued by the Board last week are a welcome sign that rail customers like wheat farmers are being heard. U.S. Wheat Associates commends the STB’s initial steps and fast action and encourages further measures to improve rail logistics and hold railroads accountable to their customers.

The following are several other USW rail and rail performance stories since early 2020:

USW Transportation Group Supports Proposed Change In Rail Rate Review
Secondary Rail Rates, Tight Elevation Capacity Continue To Support Wheat Export Prices
Rail Merger Proposals Should Improve Competition, Hold Down Wheat Shipping Rates
Rail Rates Directly Affect Basis Values For Wheat Importers
Agriculture Calls On STB To Increase Rail Competition Following Executive Order
USW To Surface Transportation Board: “Uphold The Values Of Competition”

By Michael Anderson, USW Market Analyst

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Analysis of the wheat market since February has been underscored by volatility, and no less so for the U.S. soft white (SW) wheat market.

The sudden exit of Ukraine from the export market and the uncertainty of Russia’s wheat exports are recent factors in market volatility. Dry weather is another important consideration for winter wheat markets.

The most recent USDA crop progress report rated 27% of the entire U.S. winter wheat crop as good or excellent, a 3-point drop from last week and the lowest level since 1989 for this time of year. The report encompasses all winter wheat, including SW grown in the Pacific Northwest (PNW). And with summer fast approaching, it is a good time to look at the underlying factors for the 2022 U.S. SW crop.

Conditions Improved

The PNW wheat-growing region remains in some form of drought. Yet crop conditions there are considerably better than in the Plains. Following significantly more winter moisture, spring weather has also returned to normal, with rain and mild temperatures reported in Washington’s Palouse region and north-central Oregon.

Idaho wheat conditions are rated 56% good or excellent. Oregon’s conditions rate 55% good or excellent, and Washington state, the leading SW producer, with 52% of the crop rated good or excellent.

Kernels of soft white wheat

Better moisture gave the 2022 U.S. soft white wheat crop an initial boost. If conditions hold, there will be better yields and quality compared to the 2021 crop. Soft white wheat kernel photo by U.S. Wheat Associates. 

Better Than 2021

Last year, persistent hot and dry weather hit the PNW, impacting both yield and protein content for soft white wheat. According to the U.S. Wheat Associates (USW) Crop Quality Report, the average soft white protein on a 12% moisture basis in 2021 was 11.3%, 15% higher than in 2020 and 16% above the 5-year average. Production was down 28% compared to the 5-year average. In Washington, the leading SW producer, yields were slashed 47% compared to 2020/21.

Ending stocks are especially tight, with the USDA estimating a 26% decline compared to last year. The relatively high cost of the smaller white wheat crop and week-to-week price volatility has translated to reduced SW export volume this year. USDA’s April supply and demand estimate reduced exports by 46%, and the latest USW Commercial Sales report showed soft white exports 50% lower year-to-date at 3.33 MMT.

Planted Area Up

However, USDA expects SW area planted for harvest in 2022 to be 3.56 million acres (1.44 million hectares), up 2% compared to last year. That is good news for SW wheat millers. Production potential and farmer revenue from SW is complicated by higher input costs like fertilizer, and the volatile futures market make it difficult for farmers to determine their best course of action. Even so, the improved conditions this year should benefit both SW customers and farmers.

New Crop Hope

Oregon SW wheat farmer and current USW Chairman Darren Padget is optimistic about the potential in his SW crop this year. He said this year has been much more normal than last year, with moisture being much more consistent and plentiful in the winter and spring. He said that in his area of the PNW, “we are on track for an average crop.”

Glen Squires, Chief Executive Officer for the Washington Grain Commission, said that spring conditions have been wetter and cooler than last year. He did, however, warn that subsoil moisture is about the same as last year, around 40% short or very short. Overall, Squires noted that they are optimistic that crop quality and yields will rebound from last year.

By USW Market Analyst Michael Anderson

The header photo is courtesy of the Washington Grain Commission.

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While the Russia-Ukraine conflict remains the biggest driver of wheat futures prices, U.S. winter wheat in drought conditions across the Plains is becoming an increasingly bullish factor. This latest concern is likely to overshadow USDA’s recent estimate for a slight increase in winter wheat acres with potentially serious implications for supplies heading into summer.

On Tuesday,  Chicago Board of Trade (CBOT)  soft red winter (SRW) wheat futures reached their highest level since March 23, while Kansas City Board of Trade (KCBT) were up nearly $0.21 Tuesday and up 50% since the start of the year. The Washington Post this week reported that winter wheat conditions are the poorest in more than two decades for this early in the growing season.

Drought Monitor

Dry weather is not unique in the Plains states, but some years are worse than others. The current USDA drought monitor data indicates that most hard red winter (HRW) wheat is in drought. USDA reported just 32% of winter wheat is in good or excellent condition. That is a two-point improvement compared to last week but far from the 53% good or excellent rating at this time last year. The last time crop conditions were at this level so early was in 1996. According to USDA, total wheat yields that year were 2.41 MT/HA, 24% behind 2021/22, a year that also saw substantial wheat in drought.

USDA map showing where U.S. winter wheat in drought is located

Too Much Wheat in Drought. Of the 69% of winter wheat production USDA shows growing under drought conditions, almost all the 2022/23 HRW wheat crop is struggling in dry top- and subsoil.

Tough Conditions

Growing conditions for the 2022/23 HRW crop have been tough from the start. Last fall, plantings were sown in very dry soil, and precipitation was light. Snowfall was limited, and now above average temperatures with limited rainfall have only added to the stress. Weather forecasts point to more dry weather ahead.

Kansas, the leading HRW producing state, is dry. The U.S. Drought Monitor reports severe drought in the western half of the state. However, Kansas Wheat published a recent story about varied HRW conditions, perhaps unsurprising for a state that is 400 miles (644 kilometers) long. Nevertheless, all the farmers agreed that rain is needed.

State-by-State

To the west of Kansas, conditions are also dry and windy in Colorado. High winds rob the soil of moisture, exacerbating a lack of rainfall. Topsoil moisture conditions were rated 16% very short, while subsoil moisture was rated 17% very short across the region. Both were unchanged from the week before. Nebraska’s wheat conditions are above the national average, with 32% rated good or excellent and 46% rated fair. Soil moisture is short for the state, but decent moisture in the fall has provided some relief. In South Dakota, where winter wheat planting is 4% higher than last year, conditions are rated 58% fair and 22% good to excellent. Given the overall winter wheat conditions, the crop in South Dakota looks strong.  Montana also looks good compared to the average. Wheat rated fair is 62%, while 15% is good to excellent. But like so much of the winter wheat growing area, soil moisture is poor. Most of the state is either in extreme drought or severe drought.

In Oklahoma, the second largest winter wheat producing state after Kansas, conditions improved week-over-week, with 29% of HRW rated good or excellent, up 6 points from a week ago. Texas has the most wheat in drought, with 56% of the statewide crop rated very poor. Long-term drought conditions have impacted the growth of this year’s crop. One Texas Farm Bureau member noted that some farm areas hadn’t seen measurable rainfall at all this calendar year.

April Showers Needed

April is critical for HRW development, and timely rain is needed. And while conditions are not ideal right now, farmers as ever remain optimistic.

You can follow weekly updates on the HRW crop by reading the U.S. Wheat Associates (USW) Price Report or the weekly USDA crop progress publication. In May, USW will begin publishing weekly Harvest Reports for the 2022 U.S. wheat crop.

By Michael Anderson, USW Market Analyst

 

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It is 3:00 on a brisk and overcast Tuesday afternoon, and the sun is already low in the sky. I am sitting in the galley of a tugboat — state of the art, I am told. The tugboat has all the amenities any crew would need with five staterooms, a kitchen, a washer and dryer, and even a weight room. There is some tension on board, with a hurry-up-and-wait attitude, when the phone finally rings. The deck mechanic answers and the barge we are waiting on is finally loaded with 1,500 metric tons (MT) of soft white wheat. The motor hums to life, and we start moving, slowly, toward the grain elevator. It is growing dark as two grain barges are tethered together, and we begin downriver from Lewiston, Ida., headed to Portland, Ore. It will be a two-and-a-half-day journey first down the Snake River, connecting to the Columbia River and finally to the Willamette River, to reach our Portland export elevator destinations, about 360 miles.

This river, in general, is very handsome, except at the rapid, where it is risking both life and property to pass.” – From the Journal of Sgt. Patrick Gass, a member of the Lewis and Clark Expedition.

Michael Anderson is picture front, left with the crew of the tugboat crew.

We follow the same route that Lewis and Clark took as the “Corps of Discovery” traveled west. The rivers were different in 1805, untamed by today’s intricate system of dams and locks. The eight dams that we will pass through have made it possible to harness the rivers into a major artery carrying U.S. wheat bound for export from farm to port.

The boat rocks side to side on my first night. It is comfortable, but the unfamiliar feeling makes it hard to settle in. Suddenly the boat lurches, and the light outside gets brighter. The first lock, Lower Granite, comes into view from the deck. Two spotlights illuminate our way as we creep up to the lock. Slowly we approach the brightly lit lock and are guided in along a long concrete wall. The force of the shallow water beneath us is the only thing that keeps the tug and barges moving forward. With inches to spare on either side, we have entered the lock. Behind the boat, a gate rises from underneath the water; it is about three feet above the surface when suddenly the gate stops rising, and our boat starts sinking below the surface. It is a rapid movement, but it continues for a long time. The watermark rises above us as we descend below the surface, protected by thick concrete walls. Finally, we stop moving. We are now 100 feet below the level at which we entered the lock. I walk to the front of the boat just in time to see the gates in front, towering above us, start to open, revealing the river ahead, and slowly we make our way out of the lock and down the river.

As a crew member aboard a tug, your day is not a simple “9-to-5.” With one crew on and one off, the day is broken into shifts of six hours each, from 12 to 6 and 6 to 12. The environment shared by the crew is family-like, cooking meals together and watching TV. Only the person driving the boat, the captain or the pilot, is constantly on watch. The deck mechanics jump into action when the boat enters a lock or when we pick up another barge, and this journey is a four-barge tow, meaning four barges being pushed by one tugboat.

From the bridge, the captain has a sweeping view on all sides, and plenty of sophisticated equipment helps him navigate even when we are surrounded by fog, which in the Pacific Northwest is common. Another lock is just ahead. The boat only moves about nine miles per hour. We fit into the lock with precision, again with just a foot on each side to separate us from the massive concrete walls. Unlike the lock last night, this lock is too short to fit the whole tow in at once, but that is nothing out of the ordinary for this crew. Once the barges are tethered in place, the captain skillfully maneuvers the tugboat like a game of Tetris into a tiny space giving the back of the boat just enough room for the lock keeper to close us in. Again, a large iron gate rises from the water behind us, and like an elevator, we start moving down inch by inch. In front is what looks like a massive garage door. The lock opens, revealing the next stretch of the river ahead.

The mechanics of the lock are simple: we are moving down river with the flow of the water, so when we enter a lock, it is full of water. The lock seals behind us, and a valve is released to allow the water to rush out of the lock. The tow itself is being moved to the same level as the river we are moving down. Once the tow is at the same level as the water outside the lock, the valve is closed, and we wait for the massive concrete door ahead of us to open so the tow can move out. It is a similar procedure for ships going upriver against the flow, but instead of the valve releasing water, the valve fills the lock. It takes about 30 minutes to pass through each lock.

The Columbia Snake River System is a superhighway for moving wheat and other agricultural products from farm to market. The barges and rail lines that run on both banks of the Columbia River carry more than 55% of all U.S. wheat bound for export each year. Barges are the most efficient way to move large volumes of grain, making the river system a cost-effective and “green” logistical option. The Army Corps of Engineers maintains the lock system; its history goes back to the 1930s when President Franklin Roosevelt personally inaugurated Bonneville, the first of the eight dams and locks east of Portland.

After about 60 hours on board the tugboat, we arrive in Vancouver, Wash., on the north bank of the Columbia River. We drop off two barges at an export elevator and proceed west again, up the north-flowing Willamette River that bisects Portland. It is my third river in a week, and we are taking the last barge to an export elevator just across the river from the U.S. Wheat Associates (USW) West Coast Office. There is a vessel at berth waiting for the wheat we carry. The crew drops the barge, and me, at the elevator. I walk up a set of metal stairs connected to a hoist and hop off, touching land for the first time since Tuesday. I walk across the river on Portland’s Steel Bridge, under which the wheat from our tow will pass on its way overseas, to my office.A tugboat pushes a grain barges down the Snake River on its way from Lewiston, Idaho to Portland, Ore.

By Michael Anderson, USW Market Analyst

This story was originally published on October 21, 2019.

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In 2021, the Canadian Pacific Railroad (CP) announced plans to purchase the Kansas City Southern Railroad (KCS). After a few sidetracks, the proposed transaction is now under final review by the U.S. Surface Transportation Board (STB) to determine whether the two Class I railroads can merge. If successful, the new system will become the first tri-national railroad in North America.

On Feb. 22, U.S. Wheat Associates (USW) filed comments with the STB, stating opposition to the rail merger as “inconsistent with the public interest.” USW also suggested that, should the merger proceed, the STB should impose certain conditions “to eliminate the adverse impacts this transaction will have on wheat shippers that are large rail shippers in the United States.”

Wheat Depends on Rail

Farmers export approximately 50% of their wheat crop each year. As such, U.S. farmers depend on the railroads to provide reliable and affordable access to export markets. Wheat farmers rely on the railroads in large part because of location. A significant volume of exportable wheat is grown in the Plains stretching from Montana to Texas and the Pacific Northwest (PNW). Rail transportation in the PNW is supported by regional river access to ports. Shippers in the Plains states are captive to rail freight through their distance from any genuine alternative.

In its comments to the Surface Transportation Board, USW noted that the market power held by the Class I railroads* has serious implications for U.S. wheat’s competitiveness compared to other major exporters. Rail rates over the last decade have increased exponentially, and rates for wheat are higher than rates for other commodities despite similar handling characteristics.

Where combination is possible, competition is impossible.” – George Stephenson, English Civil and Mechanical Engineer, known as “The Father of Railroads.”

Canadian Rail Advantages

The proposed transaction is especially relevant to U.S. wheat farmers as their Canadian competitors enjoy government protections that shippers in the United States do not. For example, the Canadian government enforces a Maximum Revenue Entitlement (MRE) on grain transportation to port facilities. This allows Canadian exporters to undercut U.S. exporters through rates set by statute instead of the market. During times of rail congestion, Canadian grain shippers have successfully lobbied their government to prioritize grain shipments over other sectors and have access to policies such as final offer rate arbitration and competitive switching. USW told the Surface Transportation Board if the merger would extend such treatment to the expanded CP line, Canadian shippers would enjoy an advantage that U.S. shippers under current conditions cannot.

The current KCS rail system also provides a direct link to the largest U.S. wheat importing customer, Mexico. Combining the two proposed rail lines will likely increase traffic and congestion on the combined network. In addition, nearly all Class I railroads have adopted a practice known as Precision Scheduled Railroading (PSR). USW suggested that practice actually created poorer service and higher rates for rail shippers over the last five years.

Map of the U.S. showing the rail system created by the Canadian Pacific Railroad purchase of Kansas City Southern Railroad

If approved by the U.S. Surface Transportation Board, the purchase of Kansas City Southern by Canadian Pacific Railroad would create the first tri-national railroad in North America.

Long History of Seeking Fairness

Arguments about rail competition today would not be unfamiliar across past generations of wheat farmers. Railroads have had a strong hand for a long time. During the industrial age, business interests sparred with the government over how to manage the expanding railroads.

The Interstate Commerce Act of 1887 was the first time Congress stepped in to regulate the railroads with “just and reasonable rate structures.” The railroad industry looks very different today. In 1980, the Staggers Rail Act made big changes to rail regulations. Infrastructure in the U.S. changed significantly in the decades between the two acts, necessitating changes to railroad oversight. Regulatory bodies meant to provide supervision have also changed. The Interstate Commerce Commission was abolished in 1996 and replaced with the Surface Transportation Board.

Enhancing Service

The STB must now answer a question it posed to railroads at the start of the 21st Century: “how to improve profitability through enhancing the service provided to their (railroads) customers.” Last summer, the Biden Administration directed the Surface Transportation Board to “promote competition and economic opportunity and to resist monopolization.”

In its comments filed this week, USW encouraged the STB to uphold the values of competition both for the wider railroad industry and in its oversight of “an economically sound and competitive rail transportation system.”

*There are currently seven Class 1 freight railroads in the U.S., a distinction defined by the railroads’ market capitalization.

By Michael Anderson, USW Market Analyst

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In a market-moving report in February, USDA cut its 2021/22 global wheat production estimate by more than 2 million metric tons (MMT) from its January estimate. USDA also increased its world wheat consumption estimate.

What is behind this change so late in the marketing year?

This year, high wheat prices remain a fixture as drought in major exporting countries cut trade supplies. However, coming into better focus is the hard-hitting drought in Middle Eastern countries that usually grow more wheat for domestic use.

Chart shows significant run up in wheat prices reflecting lower global wheat production.

Supply Restrained

Iran, Syria, Iraq, Turkey, and Egypt have all seen crop reductions during the 2021/22 growing season, contributing to lower global wheat production. That suggests higher wheat import volumes will be needed to meet domestic demand. This is significant because, taken as a whole, the region is expected to import 35.5 MMT of wheat in 2021/22. That is 17% of USDA’s global import forecast of 204.8 MMT. In 2020/21, these five countries imported 25.9 MMT or 13% of the global wheat trade.

USDA’s Foreign Agricultural Service (FAS) report on Iran estimates wheat production to be down 3 MMT to 12 MMT total. Syrian wheat production is estimated at 2 MMT, and in Iraq, production is estimated at 3.5 MMT. Much of the production shortfall is being made up by imports from Russia, which enjoys a transportation advantage, FAS reported.

A look into the situation in these countries is helpful.

Iran

In October 2021, Reuters reported that Iran, which has imported around 1.0 MMT of wheat annually over the last five years, would need to import 8 MMT in 2021/22 to ensure a steady bread supply. The Foreign Agricultural Service forecast wheat imports at 7 MMT this year, up nearly 5 MMT compared to other years. Iran suffered its worst drought in half a century during the 2021 growing season, cutting the wheat crop by 30%, said industry sources.

Syria

In Syria, the “Year of Wheat” campaign has been challenged by low rainfall, leaving an import gap of 1.5 MMT. The United Nations (UN) Food and Agriculture Organization (FAO) said that Syria would need to import at least 1.5 MMT of wheat. The organization said the government’s target of 1.2 MMT of local wheat, purchased through forced sales of wheat from Syrian farmers to the government, “looked unrealistic.”

Iraq

Iraq’s state-grain buyer said it procured around 3.36 MMT of local wheat in 2021, down from 5.02 MMT in 2020. The Grain Board said in December it plans to import 2 MMT of wheat in 2022. Unlike the other countries discussed here, Iraq is less price-sensitive and buys high-quality wheat from U.S., Australian and Canadian origins. When Iraq’s Ministry of trade was actively tendering for wheat between 2017 and 2019, more than half its imports came from the United States. Before this year, two exceptionally large Iraqi wheat crops have met domestic demand.

The Chart shows decline in production in Iran, Syria and Iraq that affects global wheat production

Smaller Crops. Drought has hit several Middle Eastern countries, contributing to lower global wheat production and increased trade. Source: USDA/Foreign Agricultural Service Global Market Analysis.

Turkey

This month, the USDA/FAS agricultural attaché in Turkey reduced the estimate for wheat imports in 2021/22 by 5 MMT to 10.8 MMT. Even so, the revised estimate is 33% higher than imports from previous marketing years. The FAS office also said wheat production in 2021/22 had fallen 2 MMT to 16.25 MMT. The Attaché’s report is lower than the recent WASDE report, which put Turkey’s wheat imports at 11 MMT. The Turkish Statistic Institute showed that wheat imports during the first six months of the 2021/22 trade year (June-November 2021) grew by 20% year-on-year.

Egypt

Egypt is the largest importer of wheat in the world. It produces less than half the wheat it consumes annually. According to the Egyptian Supply Minister, the government is working hard to diversify its suppliers. The recent tension between Russia and Ukraine could disrupt 80% of Egypt’s grain flow. Despite an increased harvest forecast of 9 MMT for domestic wheat, 100,000 MT more than 2020/21, domestic consumption is expected to increase 400,000 MT. Egypt’s imports are expected to increase 7% compared to the 5-year average.

The chart shows a big increase in wheat imports by Middle East countries and effect on global wheat production

More Wheat Needed. With lower production, import demand for wheat is expected to be up this year in Iran, Iraq, Syria and other wheat-producing countries. Source: USDA/Foreign Agricultural Service Global Market Analysis.

Drought, Supply and Prices

Global wheat production challenges fueled by drought have certainly driven this market in the past. And this month, USDA summarized its report this way: “the global wheat outlook for 2021/22 is for lower supplies, higher consumption, increased trade, and reduced ending stocks.”

The price incentive for farmers to produce more wheat for 2022/23 is real. The world will be watching to see if Mother Nature supports that effort.

By Michael Anderson, USW Market Analyst

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Since late December, U.S. wheat futures prices moved down through mid-January and have bounced up and down since then. For example, prices surged early the week of January 24 but lost steam by the end of the week. And the March ’22 hard red winter future price lost 4% as of Wednesday’s close. Such wheat market volatility is a challenge for importers. And there are many elements adding volatility that deserve a closer look.

Chart shows weekly wheat futures closing prices from November 2021 through late January 2022 demonstrating wheat market volatility

There is Wheat Market Volatility in the weekly closing futures prices for soft red winter (CBOT), hard red winter (KCBT) and hard red spring (MGEX) between November 2021 and late January 2022. Source: USW Price Charting Tool.

Russia and Ukraine

The ongoing tension between Russia and Ukraine has certainly added wheat market volatility. Both countries are major grain exporters, and the market seems to accept that any disruption there could have an immediate effect on supply. One grain trader quoted in AgriCensus said, “you cannot ignore [the topic], and [it] makes any trade decision very difficult to make … until things get clearer.”

But not everybody is so skittish. SoveEcon, a Russian agriculture consultancy, raised its forecast for 2021/22 Russian wheat exports by 200,000 metric tons to 34.4 million metric tons. The consultancy pointed out that the last time Russia invaded Ukraine, it did not disrupt grain exports. However, it did spark wheat market volatility as Black Sea wheat prices rose 25% in just two months.

Persistent Drought

Commercial futures trading also plays a role in wheat market volatility. The managed money takes quick profits that pressure the markets. But speculators also appear to be bullish in their wheat outlook primarily because of ongoing weather challenges to the old and new Northern Hemisphere wheat crops.

And yet a forecast for rain and snow in those areas this week prompted that significant drop in HRW futures prices. It is too early to say what the rest of 2022 has in store, but moisture is needed to put new crop winter wheat on a good footing. So, wheat importers can expect the market to continue moving with weather news.

The illustration of the 02022022 NOAA US Drought Monitor map shows persistent drought in key US wheat production areas contributing to wheat market volatility

Drought Persists in much of the U.S. Plains and Pacific Northwest wheat production regions. To help prepare for ongoing wheat market volatility, importers should monitor how this evaluation changes. Source: NOAA.

Logistic Challenges

Grain traders have had a lot to say recently about rail performance and its impact on export basis the last few months. Since December, a slowdown in rail logistics has supported wheat export basis. Fortunately, traders say those issues improved in January, but rail service for the trade is still behind where it was the year before.

According to the Association of American Railroads, U.S. weekly rail traffic for the week ending January 15 was down 7% compared to the same week last year. All grain shipments, including wheat, were down 11% the same week. In the USDA’s weekly Transportation Report, bids for shuttle service in the secondary railcar market have been high, although down significantly from where they were at the beginning of January.

New Pandemic Normal?

Lastly, we look at the persistent presence of COVID-19. This is the third winter of pandemic-induced challenges. Though lockdowns are increasingly rare, pandemic disruptions continue to rattle parts of the marketplace. It continues to be a significant challenge for logistics. That includes worker shortages and increased absences. Supply chain bottle necks will likely continue to be part of the wheat market volatility equation in 2022.

Help is Available

As these forces continue to affect wheat market volatility, importers can be assured that the U.S. wheat store will remain open for efficient delivery of high-quality milling wheat. Our local U.S. Wheat Associates (USW) representatives are available to help buyers navigate the market’s challenges – and opportunities – no matter how much volatility it throws at them.

By Michael Anderson, USW Market Analyst

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Last week, USDA released three reports giving some indication of what may be ahead for the 2022 global wheat market. Those USDA reports were the monthly World Agricultural Supply and Demand Estimates (WASDE) report, the quarterly Grain Stocks report, and the annual Winter Wheat Seedings report.

Considering all three reports, U.S. Wheat Associates (USW) notes that the latest WASDE report showed few unexpected changes to the worldwide balance sheet of wheat. Some upward revisions were made in Argentina and the EU. Still, the reports forecast global consumption far higher than production. The Grain Stocks report reflected the significant drop in total 2021/22 U.S. wheat production. Predictably, U.S. farmers seeded more winter wheat for a second year in a row.

In fact, after winter wheat plantings fell to their lowest level in more than a century in 2020/21, U.S. winter wheat seeded area for marketing year 2022/23 has increased for the second year in a row, up 2% from 2021 and 13% compared to 2020 reported the National Agricultural Statistics Service (NASS) in their annual Winter Wheat Seedings report released Jan. 12, 2022. Winter wheat seeded acres are the most they have been since 2016/17.

Bar graph showing annual U.S. winter wheat seeded area indicates an increase over the past two years to illustrate USDA Reports story.

According to recent USDA reports, U.S. farmers are responding to increased global demand and lower U.S. stocks by seeding more winter wheat in 2022.

The Winter Wheat Seedings report showed farmers planted 23.8 million acres (9.6 million hectares) of hard red winter (HRW). This report is up 1% from 2021, led by Kansas, up 3%, and Texas, up 2%. Notable drops in seeded area came in Colorado, down 2%, and New Mexico down 11%.

The quarterly USDA Grain Stocks report confirmed all U.S. wheat in storage, both on and off farm, was down 18% compared to a year ago, while disappearance was down 16% compared to the year before. Analysts expect ending stocks for the 2021/22 marketing year to be the smallest since 2013/14 at 628 million bushels (17.09/MMT).

Price Signals

Increased cash price this year has no doubt played a role in farmer decisions to seed more HRW acres. Kansas Wheat Commission CEO Justin Gilpin noted higher HRW prices as one reason for a second consecutive year of higher wheat plantings. Year-over-year prices for HRW at 12% protein (12% moisture basis) are up 24%.

Soft red winter (SRW) farmers have also taken advantage of strong pricing and increased export demand to plant more SRW acres. Estimates of SRW for the 2022/23 marketing year are 7.07 million acres (2.86 million hectares), 6% higher than last year. Increased acres are largest in Missouri, up 38%, North Carolina is up 31% and Ohio up 21%. USDA reported decreases in Maryland, down 16%, and Michigan, down 23%. The 2021/22 SRW export pace is 50% ahead of last year’s pace year-to-date.

Estimated white winter wheat (soft white and hard white) are 3.56 million acres (1.44 million hectares). This estimate is up 2% from 2021.

Desert Durum® seeded area in California and Arizona of 90,000 acres (36,421 hectares) is up 15% compared to last year and 20% compared to 2020.

Drought Lingers in the Plains

In the monthly “Wheat Outlook” report published by the Economic Research Service (ERS) of the USDA, analysts reported that major HRW producing states, mostly concentrated in the Plains states, saw conditions for winter wheat degrade since November but noted that spring conditions are more influential on production numbers. Kansas’s Gilpin noted “attention has turned to expanding drought ratings across HRW regions and potentially yield and production impacts. Dry conditions and higher input costs both are concerns.”

NOAA map shows where U.S. wheat production areas overlap with drought conditions to supplement USDA reports article.

By Michael Anderson, USW Market Analyst

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By Michael Anderson, USW Market Analyst

U.S. Wheat Associates (USW) represents the interests of wheat farmers in export markets. Each time the USW Board of Directors meet, we report on the latest market information that affects the U.S. wheat marketing environment. At their meeting the week of Jan. 10, 2022, our directors will see continued fundamental support for wheat prices from greater demand worldwide and lower production in major exporting countries.

The next USDA World Agriculture Supply and Demand Report will be released on Jan. 12. Ahead of that report, USDA pegs 2021/22 world wheat production at a record 777.89 million metric tons (MMT), 3% above the 5-year average of 757.4 MMT. Total global supplies are forecast to reach 1,068 MMT, slightly lower than last year. USDA noted lower wheat production in Canada, Russia, and the United States, which all experienced drought in the 2021 growing season.

USDA expects wheat production to be higher in Ukraine, the European Union (EU), Australia and Argentina. Specifically, in Ukraine, production is forecast up 30% this year due to increased planting and favorable weather conditions. In Australia, production is up 700,000 MT to 34 MMT. Argentina may also produce a record wheat crop this year. The Buenos Aires Grains Exchange (BAGE) estimates wheat production at 21 MMT, 1 MMT more than USDA’s December production estimate. USDA estimates 2021/22 world wheat ending stocks will drop 2% from the 5-year average and be 278 MMT, a 12 MMT drop compared to last year and the lowest level since 2016/17.

Global Consumption Outpaces Production

Fundamental support for wheat prices is also seen in global consumption that is expected to increase 7 MMT to 789 MMT, up 1% compared to 2020/21. Both global human wheat consumption and feed wheat use are forecast higher. Feed wheat use is expected to increase 2% to 161 MMT. Lower beginning stocks, drops in production for major exporters, and increased use have supported higher wheat prices overall. In the USDA’s December supply and demand report, the estimated average farm gate price for U.S. wheat is $7.05/bu, a 54% increase year-over-year.

USDA expects global wheat trade to reach 205 MMT, up 1% from last year and 6% more than the 5-year average.

Price Effect on Export Sales

Through Dec. 23, 2021, total U.S. wheat export sales of 15.8 MMT are 23% behind last year’s pace according to USDA commercial export sales data. Soft red winter (SRW) sales are significantly ahead of last year’s pace. USDA projects total 2021/22 exports will hit 22.8 MMT which, if realized, would be 16% less than last year and 13% less than the 5-year average.

Wheat Exports by Country

One year ago, USDA saw winter wheat seeded area was up 5% from 2020 at 32 million acres. USDA’s annual Small Grains Summary, released in September 2021, had U.S. wheat production at 1.65 billion bushels, down 10% from 2020 despite harvested area being up 1% at 37.2 million acres. Winter wheat production was up 9% but spring wheat production was down 44%, soft white production (both winter and spring) was down 16% and durum wheat production was down 46%.

USDA assessed that winter wheat production was 1.28 billion bushels, up 1.1 million bushels with an average yield of 50.2 bu/acre, down 0.7% compared to 2020. The area harvested for winter wheat was 25.5 million acres, up 11% compared to 2020. Hard red winter (HRW) harvested acres were up 10% and production totaled 749 million bushels, 14% more than in 2020. Soft red winter (SRW) production totaled 361 million bushels, up 35% compared to 2020. Spring wheat production was estimated at 331 million bushels, down 44% from 2020. The harvested area totaled 10.2 million acres, down 16% from 2020 with an estimated yield of 48.6 bu/acre. Hard red spring (HRS) accounted for 297 million bushels, down 44% from 2020.

Winter Wheat Planted area from 2021 to 2022

Ten years of winter wheat seeded area data from USDA illustrates another fundamental support for wheat prices.

Start 2022 With USW Market Information Reports

USW monitors USDA’s assessments of the fundamentals supporting wheat prices each month in our Global Wheat Supply and Demand Report. In addition to the January WASDE report, USDA’s Winter Wheat Seeding Report will also be released Jan. 12. Export prices are updated weekly. Visit the Market Information page on our website or subscribe to USW market reports here.

 

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Marketing year 2021/22 (June to May) has been record-setting to date. USDA estimates of global production, trade, and consumption have all outpaced previous years. However, since it’s initial 2021/22 World Agricultural Supply and Demand Estimates (WASDE), USDA has adjusted its forecast down, led by a 17 million metric ton (MMT) reduction in global wheat production by December. Ending stock estimates for the world’s top exporters are also down.

The weather has played a key role this year in lowering production in Canada, Russia, and the United States. Quality concerns following wet harvests in the EU and Australia have affected milling-quality wheat and supported markets. And Russia’s use of an export tax and now plans for an export cap have tightened supply while adding to prices. Other factors, including ballooning ocean freight rates, natural disasters, Covid-19 restrictions, and smaller domestic production in some key countries, have helped prices climb to multi-year highs (see chart below).

Chart of Wheat Exporting Country Stocks and Wheat Price Relationship

Lower stocks and higher prices dominated the first half of the wheat marketing year 2021/22. USDA steadily reduced its global production estimates from June to December mainly from some large exporting countries. Given record world wheat use, the 2021/22 average export price to date for ordinary U.S. hard red winter wheat from the Gulf ($301/MT, above) reflects the situation. Sources: USDA and USW Price Report.

As U.S. Wheat Associates (USW) marks the middle of the 2021/22 export calendar, the following are snapshots of the influential factors for major wheat exporters and how USDA estimates have changed.

Canada

Weather was a strong factor this growing season for Canadian wheat. In the Prairie Provinces, the Normalized Difference Vegetation Index (NDVI), which measures plant health, had the wheat crop maturing four weeks earlier than normal. Hot and dry weather withered the all-wheat estimate to 21.65 MMT, down 33.5% compared to the 5-year average. StatsCan’s wheat estimate of 21.6 MMT is the lowest all-wheat production since 2007. Durum production took an even steeper cut to 2.7 MMT, the lowest ever recorded for the country. Exports are also projected lower. The latest WASDE report forecast Canadian wheat exports to total 15 MMT, 43% less than last year. Year-to-date, Canadian wheat exports are running 38% behind 2020.

Australia

The South Pacific country continues to rebound from a drought-ravaged 2019/20 crop with expectations for a second bumper crop in a row. The latest WASDE report put Australian wheat production at 34 MMT, 8% higher than November’s report and 41% higher than the 5-year average. Exports too were projected higher at 25.5 MMT. Data on quality is still unknown because the Australian crop is in mid-harvest. However, wet weather has led to concern about the final volume wheat that meets milling quality standards.

Russia

Russian wheat production has been on a downward slope since June when USDA estimates of production stood at 86 MMT. The latest string of WASDE reports have cut that estimate to 75.5 MMT with 36 MMT forecast for export. Year-to-date, Russia has exported 19.4 MMT of wheat, 54% of the overall estimate despite a wheat export tax that increased to $91/MT on Dec. 10, more than double in the rate last July. On top of the fluctuating export tax, Russia is considering a wheat export quota set to begin in mid-February.

Ukraine

The Black Sea country has had an impressive production year, up 30% year-on-year, and exports running 17% ahead of last year’s pace at 14.5 MMT. Ukraine’s agriculture ministry signed an agreement with grain traders capping wheat exports at 25.3 MMT, about 1 MMT higher than the latest WASDE’s export projection.

European Union

The EU also saw higher production this year than last, driven mostly by impressive yields in Romania and Bulgaria. Exports are running 11% ahead of last year’s pace and the EU is expected to replace Russia as the year’s leading wheat exporter. Coceral, a European trade association, forecast that the 2022 soft wheat crop will drop to 125.4 MMT, 3.4 MMT less than their 2021 figure despite the area planted being only marginally reduced. Yields however are estimated to be down 3%.

Argentina

The Buenos Aires Grains Exchange (BAGE) expects the biggest wheat harvest ever for the South American country. Higher than anticipated yields have traders estimating a 22.1 MMT wheat crop, higher than USDA’s estimate of 20 MMT. Even so, the government has taken steps to discourage the pace of export license registrations.

United States

U.S. wheat production is forecast down 5 MMT this year after dry weather in the Pacific Northwest (PNW), Montana, and North and South Dakota withered average yields for soft white hard red spring and Northern durum. In its latest WASDE report, USDA said, “U.S. export prices are expected to remain elevated the rest of 2021/22, further diminishing U.S. competitiveness.” The December WASDE forecasts U.S. wheat exports to total 22.8 MMT, the smallest total in 7 years if realized.

Imports Up, Too

As wheat prices continue to rise, major wheat importers are outpacing their purchases compared to 2020/21 (see chart below). For example, Egypt made its largest single purchase of wheat ever this year, buying 600,000 MT and paid $90/MT more than the average price paid a year ago. Iran’s wheat imports are up 218% compared to last year, while Turkey’s import demand is up 36%.

Graph of wheat import volume for 10 countries at the same date the past two years.

Wheat import volumes are up in several countries even as global wheat prices continued rising. Source: USDA

Looking ahead to the second half of 2021/22, many analysts see little change in ending stocks but continued market volatility given the many unknown factors in the global economy including logistical challenges and pandemic uncertainty.  Producers and buyers now look to the potential for increased wheat acres (USDA forecasts a 5% increase in 2021/22) and better growing conditions to help add stability to the global wheat market in 2022/23.

By Michael Anderson, USW Market Analyst