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Once again, and tragically this time, Russian intervention is the underlying source of dramatic global wheat price volatility.

“…We are closely monitoring prices for the most essential social goods such as food, including bread,” said Russian Prime Minister Mikhail Mishustin this week about its domestic wheat supply. “Russian grain is in good demand from abroad, and its price is increasing. That said, it is necessary to provide the necessary raw materials, first of all, to the domestic baking industry.”

Consistent Protectionism

The Prime Minister made this comment with specific reference to the hyper reaction of global wheat prices to Russia’s invasion of Ukraine and the immediate impacts of the widespread economic sanctions levied on Russia in response. Yet it spotlights the core tenants of Russia’s protectionist and heavy-handed wheat supply and price control policies. Russian intervention has been front and center since the country first entered the global wheat export trade.

Anyone who does not take the Prime Minister at his word on this sets themselves up for a very disappointing and expensive lesson. Defending Russian domestic supplies and keeping domestic prices low by withholding supplies from the world will always be their primary wheat policy weapon. And they deploy it without regard for the harm and expense it creates for anyone.

Underscoring this point, the Russian Ministry of Economy confirmed on Mar. 11, 2022, that they are banning wheat exports through Aug. 31, 2022, to their fellow Eurasian Economic Union member states, including its Ukraine invasion staging partner Belarus, along with Armenia, Kazakhstan and Kyrgyzstan.

Every Spike Reveals Russian Intervention

In six documented situations since 2007, when the global wheat market showed any sign of stress, the government of Russia stepped in to impose an export ban, export tax or export quota to isolate their home market. These actions intentionally limited world wheat importers’ access to Russian wheat supplies. This Russian intervention further magnified any supply shortage and accelerated the rise in wheat prices.

Twice in this time frame, Russian military aggression against Ukraine directly caused world wheat prices to spike sharply higher. The world is reeling viscerally and economically from the shock of that situation right now.

Chart shows correlation between HRW futures price spikes and Russian intervention.

Correlations. Russian intervention is associated with the upward spike in hard red winter wheat futures prices. Factors include export restrictions, taxes, and, sadly, two invasions of its sovereign nation neighbor Ukraine. Copyright 2022 U.S. Wheat Associates.

Rampant Uncertainty

The COVID-19 pandemic lifted the tide of global inflation by disrupting global supply chains. Now, Russia’s war on Ukraine has blocked nearly 30% of the expected wheat export supply from governments and people that depend on it the most. Uncertainty runs rampant. And it is almost impossible to know how this war will be prosecuted. How long it will persist? What will the physical and economic situation of Ukraine and Russia be at the end?

Market analysts everywhere are trying to assess the many implications of this latest Russian intervention. Who will be most severely impacted? What will be the magnitude of the shortage created in the global wheat supply chain? And how will the world’s remaining supplies be apportioned, priced and relocated to the most severely affected countries?

Extreme Volatility

The extreme wheat price volatility seen in the past two weeks sits witness to this uncertainty.

Such high prices and volatility create challenges for the world’s wheat buyers and farmers and grain traders, who must also use the futures market to manage price risk. It is important to note that the U.S. wheat market remains fully open to importers and users everywhere. Dependable U.S. wheat producers and our reliable export system stand in the gap. They are ready and able to supply wheat as broadly to the world as our own supplies, and logistical capacity can accommodate.

Supplies Available

In addition to the wheat price inflation attributed to Russian intervention, U.S. wheat prices reflect that last year’s drought in the Northern Plains and Pacific Northwest limited current U.S. supplies. However, this year’s original export expectations and calculations do not include all U.S. supplies available. And wheat farmers will harvest a new crop starting in June.

U.S. Wheat Associates (USW) also creates additional value for U.S. wheat through the services it offers its customers. As they navigate this extreme market situation to secure the wheat necessary to feed people worldwide, USW remains ready to provide any information, tools and assistance within our means that may be helpful.

By USW President Vince Peterson

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By Michael Anderson, USW Assistant Director, West Coast Office

On Nov. 13, 1991, the Chicago Tribune ran this headline: “Soviet Bread Prices Skyrocket By 600%.” Bread was already in short supply and if you bought it that morning, you would have paid 60 kopeks, by that afternoon it was 3.60 rubles.

Apparently, the memory of such an event nearly three decades ago is still fresh in the mind of Russia’s President Putin. After he criticized the high price of flour and bread recently, the government quickly announced plans for wheat export taxes and an export quota, even though Russian farmers produced a massive wheat crop for this marketing year.

U.S. Wheat Associates (USW) is not surprised. Despite making up a quarter of the worldwide wheat market, Russia continually insists on controlling exports to keep domestic food prices under control.

Over the last 13 years, Russia has placed some form of restriction on wheat exports six times, including twice in the last year. And, as a result, that choice always led to unnecessary disruptions to wheat buyers from the run up in world wheat prices and uncertainly over supplies.

In 2007, for example, Russia had one of its best crops ever to that point, harvesting just under 50.0 million metric tons (MMT) of wheat. Despite the steady increase in Russian production, a steep rise in the domestic price of wheat was remedied by a 10 percent export tax followed by a 40 percent export tax in January 2008, that continued until July of that year.

Drought and record high temperatures caused severe damage to the 2010 Russian harvest. While global wheat prices tripled, Russia enacted a complete ban on Russian wheat exports that lasted from Aug. 15, 2010, through July 1, 2011.

In early 2015, a depreciation in the Russian ruble led to attractive Black Sea wheat prices. Traders exported a record amount that season. To slow down exports, Russia once again applied an export duty. The tax was lifted in May but implemented again in July (the Russian trade calendar runs from July 1 to June 30).

When uncertainty over the impact of COVID-19 erupted in the spring of 2020 a Russian export quota of 7.0 MMT was applied to the April 1 to June 30, 2020, shipping window. By the end of April, that quota was exhausted and put a stop to all Russian wheat exports until July 1, 2020, the beginning of the new export calendar.

Which brings us to today. Russia has once again announced plans for an export quota that will run between Feb. 15 and June 30, 2021. The plan calls for a €25 per metric ton (MT) export tax on wheat ($30.40/MT) until a 17.5 MMT quota is met – at which point wheat exports will be stopped.

Aside from export taxes and outright bans, the Russian grain industry has also seen rail shipments slow the movement of wheat to export terminals, increased scrutiny on approval paperwork on exporting vessels and a slowdown in receiving phytosanitary certificates to as many as six days.

In fact, grain traders have told news services that they are already experiencing delays in obtaining export documents from Russia’s customs service.

Fortunately, the U.S. wheat industry offers reassurance in the fact that our doors are open for business 365 days per year. In our collective efforts to efficiently supply the widest range of the highest quality wheat in the world, we live up to our claim as the world’s most reliable supplier.

The U.S. government by law cannot block exports except in the cases of a declared national emergency. Further, export taxes are expressly forbidden by the U.S. Constitution.

 

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By Claire Hutchins, USW Market Analyst

Extremely high temperatures and below-average precipitation levels prompted USDA to reduce its Russian wheat production forecast from 78.0 million metric tons (MMT) in its June World Agricultural Supply and Demand Estimates (WASDE) report to 74.2 MMT in its July WASDE report. That is a 5% reduction month over month. Russia’s leading agriculture consultancies also reduced their Russian wheat production forecasts. Between June 11 and July 24, SovEcon reduced its 2019/20 Russian wheat production forecast by 10% from 82.2 MMT to 73.7 MMT. Between early June 12 and August 5, IKAR reduced its Russian wheat production estimate by 6% from 80.2 MMT to 75.5 MMT.

All sources point to lower Russian wheat production, but SovEcon and IKAR differ in how they see reduced exportable supplies affecting Russian export prices. Despite reducing its wheat production forecast, SovEcon estimates “Russia’s wheat crop issues are not big enough to impress the market.” Accordingly, it quoted Russian FOB values for 12.5 protein wheat (equal to 11.0 protein on a 12% moisture basis) at $197/MT on July 29 and at $195/MT on August 2. IKAR, on the other hand, believes the country’s reduced exportable supplies contribute to rising FOB values. According to IKAR, Russian FOB values for 12.5 protein wheat rose from $193/MT on July 23 to $196/MT on July 30.

How should these price differentials be interpreted? A look at recent tenders from Egypt’s state commodity-procurement agency, the General Authority for Supply Commodities (GASC) provides some insight. Through GASC, Egypt publicly offers to purchase wheat in set amounts from global exporters. Grain trading companies source wheat from multiple origins to bid on the GASC tenders, vying to offer the lowest FOB prices available. The tender results are available to the public, offering a clear picture of current export prices by origin source.

Often, conditions affecting exportable supplies in the Black Sea are apparent in GASC tender results. For instance, between May and July 2018, USDA reduced its Russian wheat production forecast by 7% on abnormally wet conditions affecting spring wheat planting and abnormally dry conditions affecting winter wheat areas. In 2018, for example, Black Sea supply concerns made their way into GASC’s tender results. On June 12, 2018, Russia’s lowest offer at the GASC tender was $209/MT FOB. By August 2, 2018, Russia’s lowest offer reached $235/MT FOB as supply concerns worsened.

While Russian 2019/20 wheat production is expected to increase 3% over 2018/19 levels to 74.2 MMT, its exportable supplies (beginning stocks plus production minus domestic consumption) are expected to fall 2.0 MMT from last year to 49.0 MMT in 2019/20. This year’s weather challenges are again present in recent Egypt’s GASC tender results. Between June 11 and August 6, the lowest FOB offer Russian wheat increased 4% from $197/MT to $204/MT. It is worth noting that the August 2 U.S. Wheat Associates (USW) Price Report estimated Gulf FOB export price for U.S. hard red winter (HRW) with equivalent protein for September delivery at $205/MT.

U.S. Wheat Associates (USW) believes these price trends could continue if hot, dry conditions persist across Russia’s predominant wheat growing regions.

Every month, USW publishes a graphic summary of the latest data from USDA’s WASDE report, including global wheat market factors, major country and regional export history and U.S. wheat supply and demand summaries by class. View the monthly summary here.

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By Claire Hutchins, USW Market Analyst

In its December World Agricultural Supply and Demand Estimates (WASDE) report, USDA predicted a 4 percent year over year decline in world wheat production for marketing year 2018/19, driven by severe drought in Australia and current cold, wet conditions in Russia. Australian production is expected to fall 32 percent below the 5-year average, the lowest level since 2007/08. Russian production is expected to fall 18 percent year over year, which would exceed the 5-year average by 6 percent.

While USDA predicts a decline in global wheat production, it expects total wheat consumption to rise. This year, consumption estimates total 744 MMT, 4 percent above the 5-year average. Feed wheat consumption estimate is down 4 percent year over year, but human consumption is up 1 percent year over year and continues to drive overall consumption levels.

Australian drought is driving more than just production numbers. Exports are expected to decrease significantly year over year from 14 million metric tons (MMT) to 10.5 MMT. While production and exports decrease, Australian feed wheat consumption is expected to reach 5.5 MMT, 44 percent above the 5-year average. Total Australian consumption includes 61 percent feed wheat in 2018/19, up 8 percent from last year, as Australian producers struggle to support their livestock through the dry weather.

Pacific Northwest (PNW) free on board (FOB) prices have been relatively stable for the past few months. Soft white (SW) export price remains virtually unchanged from mid-October, while export prices for hard red winter (HRW) and hard red spring (HRS) are on the rise. With Australian exports shrinking, the United States increased exports to the Philippines, Thailand, and Bangladesh. Total exports to South Asia are up 18 percent year over year. The decline in global production and incline in global consumption will continue to support U.S. export prices in the coming months.

The United States holds the largest supply of exportable wheat in the world at 50 MMT. U.S. exportable supplies, as a percentage of top exporting countries, is up 25 percent year over year. While global production is shrinking, as always, U.S. wheat remains the world’s most reliable supply.