Market Insider

Who Wins When Russian Wheat Loses?

Grain markets were mixed last week, to the point where the bulls continue to double down on western Canadian and northern Plains crops, while the bears are busy chewing away at corn, soybeans, and winter wheat. Oats, canola, and hard red spring wheat continue to climb higher as the reality of this past growing season’s drought conditions in the areas where these crops are mainly grown, is really showing up on the yield monitor and at the elevator.

Last week’s trading activity was also a lead-up to the big event in grain markets this week: the USDA’s October WASDE report. Leading into it, the market is expecting to see slightly smaller US corn production, but a bigger soybean harvest. With the USDA’s stocks report from September 30th showing a lot more soybeans available in the U.S., domestic soybean ending stocks are expected to push back above 300M bushels, a healthy increase from the 185M bushels shown in the September report.

However, soybeans and corn futures continue to be pressured by wetter weather in South America, especially Brazil, where concerns of the second year of La Nina have been fueling bullish speculation. Despite the La Nina concerns, CONAB (basically the USDA of Brazil) is projecting record corn and soybean harvests. With the Brazilian soybean planting campaign starting out faster than usual though, the bulls are starting to steer away from betting on weather and against the farmer.

As I mentioned in last week’s column, U.S. wheat stocks were much lower than expected in that Grain Stocks report, and so U.S wheat supplies should also fall from the 615M bushels that the USDA last forecasted in the September WASDE. However, wheat markets continue to be underpinned by what is going in Russia, namely, the Kremlin’s weekly setting of export taxes. SovEcon noted last week that they expect Russian wheat exports to total 34.3 MMT this year, down from 2020/21’s 38 MMT and the USDA’s current forecast for 2021/22 of 35 MMT. With the government eating away at both the farmer’s and exporter’s profit because of the tax, Russian farmers might plant less wheat for the 2022/23 crop (be it this fall or next spring).

These lower Russian wheat exports is mostly helping shippers in Europe, Australia, America, and some other Black Sea countries. Digging in, a weaker Eurodollar and strong demand have helped EU wheat exports surge, now tracking 45% above the pace seen a year ago with 8.1 MMT shipped out. Supporting increased trade out of Bulgaria, Romania, and Germany has been the late-season rains in France, which severely impacted the quality of the wheat harvest there and is resulting in a lot more blending. In fact, the French Ag Ministry just lowered its internal wheat harvest estimate by 900,000 MT to now sit at 35.2 MMT. Worth noting here is that estimates of the size of the French wheat harvest have fallen by more than 2 MMT since July!

In the U.S., soft red winter wheat exports are tracking nearly 30% higher year-over-year with almost 1.1 MMT sailed, but hard red winter wheat shipments are down almost 27% year-over-year to 2.84 MMT. Similarly, U.S. HRS wheat exports are down 14% year-over-year with 2.23 MMT sailed. Finally, just 61,400 MT of U.S. durum has been exported, down 81% compared to the same week in the 2020/21 crop year!

Relatively speaking, Canadian durum exporters are doing a lot better than their U.S. counterparts with nearly 600,000 MT of durum shipped out through Week 9 of the country’s 2021/22 season. This is good for a 23% improvement over the same time a year ago, but it is 3% behind the 3-year average. However, the last few weeks have been trending lower after some bigger sailings, namely Week 1 and 5, as shown in the first chart below.

Conversely, non-durum wheat exports from the Great White North have totaled a touch under 2.5 MMT, which is well below the pace seen at this time a year ago, as well as the seasonal average. Will these numbers improve if Russian wheat exportability continues to decline? Frankly speaking, probably not as Canadian wheat quality doesn’t usually compete with that out of Russia, except for lower-protein products (12.5% or less). Nonetheless, basic economic theory holds that, whenever a government inserts itself into a private market, the results almost never look like what said the government set out to accomplish.

In this case, Russia’s government wanted to quell the risk of food prices rising (read: inflation), but that’s happening anyway because of global dynamics, and the result is they may not get as much wheat production in years to come. Alternatively, the EU’s strong pace of wheat exports likely will subside, but if not, they’ll have to import more higher-quality products (read: HRS wheat), which would, of course, be good for Canadian exporters and farmers (assuming there’s enough to be loaded onto a couple of boats!).

To growth,

Brennan Turner