Market Morsel: Wheat to rocket in price?

Market Morsel

On a radio interview this morning with ABC, I spoke about the grain market and how, in reality, the biggest drivers of price globally will be Russia, not just now, but well into the future.

The first chart below shows the wheat market for this year. There was a huge rally in May which was largely caused by concerns related to the Russian crop. In the past couple of days, the wheat market has reacted to news that the Russian winter crop is not in as good of a condition as hoped.

There are estimates that the winter wheat crop is 37% in poor condition, compared with only 4% in the prior year. However, other analysts are unconvinced, and whilst they expect downgrades, they do not believe it is as bad as first expected.

Winter wheat accounts for 70-80% of the crop and has a higher yield due to being grown in milder regions and having a longer growing period. Therefore, if there is a problem with the winter crop, then that has huge ramifications for their ability to enter the export market.

The second chart shows Russian wheat production since 2012, using estimates from Russian analyst Sovecon. The current forecast is for 81.6mmt, with the likelihood of further downgrades. If we start falling significantly below 80mmt, this will dramatically impact global wheat pricing.

The third chart below is important as it displays Russia’s (along with our) contribution to the global wheat trade. At the turn of the century, Russia was at times only providing <5% of global wheat; in recent years, it has been above 20%.

If Russia has a major issue, then we could be in for some turbulent times. This will be bad for consumers of grains, but for grain producers, it is a huge opportunity.