WESTERN PRODUCER — A major U.S. farm lender believes a wheat price spike is on the horizon.
CoBank is alerting U.S. grain elevators storing large volumes of wheat that there is potential for a “sharp rally in wheat prices” in the year ahead.
“The flood of cheap Russian wheat into the global market may have created a false sense of security in the world wheat market,” CoBank grains and oilseeds economist Tanner Ehmke said in a news release.
“The greatest margin risk to storing wheat is the shrinking world wheat crop outside of Russia and China, which leaves the market vulnerable to supply shocks and extreme volatility in wheat prices.”
The world wheat stocks-to-use ratio, excluding Russia and China, is nearly the tightest on record.
“Drought has substantially reduced wheat supply in Argentina, Canada and Australia,” CoBank said.
Meanwhile, Ukraine’s wheat faces numerous obstacles getting to market.
North Africa’s poor wheat harvest will create greater demand for imports, as will India’s ban on white rice exports, which is shifting demand from rice to wheat in markets such as Southeast Asia and Africa.
China will likely be in the market for more wheat as well due to quality problems with its harvest.
CoBank said Russia’s cheap wheat is due in part to 30 percent year-to-date devaluation of its currency compared to the U.S. dollar.
“(That is) putting Russian exports on sale and pushing down world wheat prices,” the bank said in its news release.
DTN lead analyst Todd Hultman thinks there could also be an ulterior motive behind Russia’s cheap wheat.
He believes Russia is driving down the price of its grain to curry favour in African nations for strategic military purposes.
In a recent column he alleged that Russia’s cheap wheat policy is a “humanitarian cover for malevolent goals that has expanded Russia’s influence in Africa and at the United Nations.”
Russia’s discounted wheat is making wheat from other exporting regions uncompetitive.
The U.S. Department of Agriculture is forecasting the smallest U.S. wheat export program in 50 years in 2023-24.
Prices are no longer covering the average cost of production, which is estimated at around US$9 per bushel. That is despite U.S. wheat stocks being at the second lowest level in 10 years.
In an interview, Hultman said prices should be 50 cents to $2 per bu. higher than they are today given the stocks level.
With the war in Ukraine, he was anticipating a shortage of wheat and rising prices. However, the opposite happened, with the cheapest world wheat prices in more than two years.
Hultman recently read the transcript of a testimony from a senior official with the Africa Center for Strategic Studies, a research group within the U.S. defense department, which helped shed some light on that conundrum.
Joseph Siegle, research director for the organization, told the U.S. House of Representatives in September 2022 that Russia has deployed the Wagner Group, a mercenary army, in at least six African countries.
“Moscow has followed a pattern of swooping in with irregular forces to prop up politically isolated authoritarian leaders facing crisis in geostrategically important countries,” Siegle said in his testimony.
“These leaders are then indebted to Russia, which assumes the role of regional powerbroker.”
The testimony explains that one of Russia’s objectives is to establish a naval presence along the southern Mediterranean Sea near the Suez Canal and the strait between Yemen and Djibouti, two important chokepoints for international trade.
“No wonder Russia bends over backward to be the cheap wheat provider to Egypt and why it has shown special attention to Libya, Egypt and Ethiopia,” Hultman said.
And the country has plenty of wheat to sell at those depressed prices. Russia’s exports hit a record 46 million tonnes in 2022-23 and the USDA is forecasting a new record of 49 million tonnes this year.
The European Union is forecast to be the next biggest competitor at 37.5 million tonnes.
Hultman said Russia’s cheap and abundant wheat is the primary bearish factor that is forcing U.S. farmers to switch to growing more corn and soybeans.
“Some will say that’s just how markets work. Russia is being rewarded because it’s the low-cost producer, and U.S. farmers aren’t keeping up,” he said.
“I would argue Russia is not a market-based producer but is politically using cheap wheat as a tool for advancing military goals that are dangerous to international trade and to the African nations Russia pretends to serve.”
He added that it is difficult for western nations to make a fuss about what is happening because they do not want to be perceived as depriving poor nations of cheap grain to help combat a mounting hunger crisis.
Contact sean.pratt@producer.com
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