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Global perspective on wheat trade offered

U.S. Wheat Associates President Vince Peterson traveled to Australia last month to speak to an Australian farmer organization about what the future might hold for wheat farmers around the world. His message was far more upbeat than might be expected at a time when U.S. wheat planted area is historically low and Russian wheat production and export demand in on the rise.

Peterson shared this summary of his presentations to U.S. Wheat.

There is no doubt that Russian wheat has benefited from record yield after record yield for the last five years leading to an 85 million metric ton year in 2017. That yield was about two-thirds of a metric ton per hectare greater than its trend line projection. Digging deeper, though, it is interesting to note that Russia has not increased its wheat planted area all that much. It is about 3 million hectares on the trend line. Its farmers have increased land area planted to “other crops” at more than double the rate they increased wheat. Russian farmers and investors, like their counterparts around the world, will be looking for the best possible return on that land. As the cropping trend continues, it implies a shift in future growth away from a wheat concentration to broader diversification of crops.

Buyers and other industry analysts also need to remember that Russia has, on average over the past five years, sold more than 80 percent of its wheat exports to buyers in Africa and the Middle East. Those regions are wheat production deficient—and per capita wheat consumption in many of those countries is very high. Population in those regions will grow by 1.3 billion people who will collectively eat at least another 60 MMT of wheat every year and about 50 MMT of that increased demand will likely need to be imported.

In addition, the final cost of imported wheat, rather than end-product quality, weighs most heavily in these same markets. The signals from these buyers back to Russian wheat farmers will continue to be a need for low to moderate protein wheat at very low, delivered prices.

Rightly so, markets in Russia’s “backyard” will represent its most profitable export opportunity. In turn, these market factors offer limited incentives for Russian farmers to produce high performing wheats for far off markets.

Freight costs matter, too. The cost of moving wheat has shifted wildly over the past 15 years. The commodity spikes in 2007 to 2012 in both prices and trade volume, fueled by the price of petroleum reaching $140 per barrel, pushed ocean freights to outlandish numbers about 10 years ago. That provided an incentive for ship building and expansion that more than doubled the dry bulk carrier fleet.

The growing cargo fleet capacity peaked in 2015. In 2016, for the first time in a dozen years, the fleet capacity began to decline. Ocean freight rates quickly hit bottom so Russia could afford to move wheat almost everywhere. That pendulum is now starting to swing back. Oil prices have moved back up; the ship supply will continue to shrink with fewer new commissions and increased demolition/scrapping. It is likely the next cycle will “normalize” with freight rates back at least at moderately higher levels that are profitable for ship owners. The next cycle is going to make it far more expensive, and far less economical, for Russia (and any origin, for that matter) to be shipping their wheat half way around the globe into a competitor’s backyard. Particularly if those supplies are just of moderate to fair quality parameters.

So, my crystal ball conclusion is that the influence of Russian wheat is not done growing, but the outlook for other global suppliers is much more positive. While Russia’s wheat industry is here to stay as a main player in the world market, it will behave more responsibly to these changing market signals in the next 20 years, making this next cycle far different for the United States, Canada, Australia and other suppliers than it has been in the past 20 years.

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