Wheat prices worldwide hit some of their highest levels in recent years through 2021 amid a huge drop in production in Canada and the US, quality issues in Europe and exports restrictions in Russia combined with poor crops reported in a few of the main importers, including Turkey, Iran, and Iraq.
On the back of that dynamic, prices have been steadily increasing since July, continuing trends that started through 2020, before a decline set in through the second half of November.
Benchmark prices for 12.5% Russian wheat illustrate the impact the dynamics have had on cash prices – with the spot market assessed by Fastmarkets Agricensus at $233.50 per tonne in mid-July.
That was the lowest point of the year and came as the new harvest hit ports, but it ushered in a period of steady climbs that saw Russian wheat values climb to $345 per tonne – a near 48% rise – by the close of November.
Since then, prices have eased for the region – and the rise of southern hemisphere production has eased some supply jitters.
But the price decline also came as demand from the private market tailed off and buyers were prepared to live hand-to-mouth while they eyed the development of crops in the southern hemisphere, as both Australia and Argentina headed for new record production highs.
Thus, the questions among the trade about the prospects for the second half of the marketing year became mixed.
On one side, buyers do not want to pay up to secure volume as they see the prices decline and huge crops looming.
On the other side, however, sellers expect more demand to come up buyers’ strategies changed to more hand-to-mouth buying in a move that focuses greater attention on spot markets, and where gaps in demand could provoke a price spike amid last-minute buying.
That dynamic was exacerbated by the question of quality – particularly in Australia where steady rain all but guaranteed a record production, but at the cost of some of its protein content.
Fastmarkets Agricensus researched and pulled together the main factors that could affect the trade through the second half of the 2021-2022 marketing year.
Supply and demand
Estimates for world wheat production dropped by 14 million tonnes between July 1 and December, according to the USDA, as increases for Australian and Argentinian production was not enough to offset the drop in Canadian, Russian, US, Kazakhstani, or Iranian production.
The imbalance between the two fundamentals is such that, even with Argentina and Australia expected to chip in with another 1-2 million tonnes of production as the harvest gathers momentum, it still won’t offset the production losses recorded elsewhere.
Meanwhile, projected imports were slightly higher compared to last year and had been increased by another 1.3 million tonnes between the figures for the July Wasde and December’s update – further squeezing outlooks.
Even factoring that increase in, the signs suggest that recent price breaks have prompted strong tender-based buying from destination markets.
Most of the countries that use this method to secure supply have been buying wheat more actively within tenders compared to the same period in 2020, Fastmarkets Agricensus data shows, with only Egypt’s purchases lagging by around 28%.
While that’s a significant lag in the world’s biggest wheat importer, in general, the data suggests that importing countries have already covered much of the surplus expected by carefully exploiting price breaks.
And for Egypt itself, the country’s state importer agency GASC broke its own tender-buying record in late November, hoovering up 600,000 tonnes in its biggest-ever purchase, before returning to the market in late December looking to buy again.
Bottlenecks play in
Sales of Australia’s record-breaking wheat crop – now put at 34 million tonnes by the USDA – started months ago, even before the harvest started as exporters grew increasingly confident of another big crop.
As such, currently only parcels for April-May are available, with a few limited positions still lingering for March.
That means – despite the big crop – it’s hard to secure Australian wheat cargoes for prompt loading, forcing buyers in need to go elsewhere to secure product.
With that limitation also reflecting Australian logistic capacity, the restriction on how much of the huge crop the country can export month-after-month also means that Australian wheat will likely stay competitive until well into the next crop – making it a competitive presence in the world market up until October 2022.
Argentina is also set to land a record crop but, as with Australia, a big part of that production has already been booked – around 9 million tonnes according to trade sources and export licenses.
That represents a sizeable chunk of what’s expected to be a 12 million tonne export limit, a level already increased from the initial 9 million tonne limit, and trade sources expect it to go higher.
Currently, the USDA puts Argentina’s wheat exports at 13.5 million tonnes, while the trade expects to could reach up to 14 million tonnes.
However, in amongst the big supply outlooks, in practice much of that supply is already mostly sold out – at least for the next few months.
Russia and its limitations
As the world’s biggest exporter, Russia and its state interventions represent another key factor that has created uncertainty and imposes limits on world supply.
The country’s export tax – which is designed exactly for the purpose of ensuring domestic supply over the export market – changes on a weekly basis, leaving traders unwilling to take a risk on securing forward volumes to export.
As such, much of the focus has been on trading mostly for spot loading positions in recent weeks.
With talk now that the government is looking at imposing an 8 million tonnes export cap from February 15 through to the end of the marketing year, the figure should not bring major changes to the situation overall.
At that level, the export cap is at around the same volume that was handled last year over a period when Russia had an additional 5 million tonnes of supply from a bigger harvest.
So, in itself, an 8 million tonne cap should not be a limit.
But at the same time, the devil is in the detail, as the quota is expected to be allocated according to the export volume handled by individual companies between December 1, 2020 and November 30, 2021.
That could freeze some exporters out of consideration.
Higher inputs
Another factor that is expected to add further support is the price of key inputs like fertiliser, seeds and energy costs, which have increased significantly over the last six months and are expected to push up the costs of production for 2022-2023 marketing year.
The estimate for the increase of production costs in the Black Sea region envisages inflation of up to 30% – making it unlikely that producers will be selling aggressively as they seek to defend a shrinking margin.
Production outlooks
While it remains too early to estimate with any degree of confidence the production outlook for the next crop, the first early planted projections look favorable.
Ukraine has planted 4% more fields with wheat, even with the increase in input costs, and the weather so far remains favorable.
Early projections for the Russian wheat crop are also higher compared to the current crop – at around 81 million tonnes, but are still lower compared to the record figures.
What will be – as always – the determining feature is the weather.
With fewer inputs likely to be used as farmers look to shield themselves from some of the ramp up in prices, developing crops will be heavily dependent upon getting the right weather at the right time in order to land good volumes.
This article was originally published to Fastmarkets AgriCensus on Wednesday December 29, 2021.
