01 Nov RUSSIA’S ROLE IN RECENT WHEAT MARKET MOVEMENT

For those casually tracking the wheat market, you may find yourself scratching your head with the recent market strength and abrupt turn lower. Soft wheat prices in Chicago had rallied to levels not seen since 2014, and the hard red winter and spring wheat markets have similarly been pulled higher. Since hitting its low at the end of June, the December 2020 Chicago wheat market rallied 33 percent to the recent high.

To get this rally, we must be facing extreme tightness in the domestic wheat market…right?

Not exactly. Production in the US was down about 100 million bushels from a year ago, but it was far from a bad year. Even more importantly, ending stocks are very large from a historical perspective at 883 million bushels (or 42 percent of usage). Again, this is tighter than a year ago (stocks/use was 49% in the previous crop year), but 2020/21’s ending stocks/use ranks as the 7^th largest in the last 30 years. See Figure 1.

So, did the corn crop fail? Corn is king after all, and the price of wheat can be influenced by the direction of corn.

Like with domestic wheat supplies, corn cannot easily be blamed for the rally either. Production of US corn is better than a year ago, with harvest now in its final weeks. During the rally in wheat, there have been higher corn prices for the following reasons:

1. Strong export demand from China. Starting in July, sales of US corn to China have been huge (partially to fulfill the Phase 1 trade agreement and partially to help with very tight corn supplies in China).
2. Expectations for an absolutely huge crop in the spring came down with weather issues in August and September. So domestic supplies are still comfortable, but not overwhelmingly huge as initially thought.
3. Prices had been extremely low in the spring as all commodities were hammered by the fall in crude oil and uncertainty surrounding the pandemic. Markets have been recovering from those levels.

One could say that corn was a bullish influence on the wheat market, but the pull higher cannot be pinned on corn alone. In fact, the biggest reason for price increases through the fall and the subsequent decline has to do with global supplies: specifically expected new crop supply expectations in top-producing Russia.

To first consider the role of Russia in the global wheat picture, we have to look back at the country’s past. Through the Cold War and into the 1990’s, Russia was a net importer of wheat. That shifted in the early 2000’s, as the country began to boost its production with the goal of increasing exports from year to year. In just 20 years, Russia has gone from importer to the world’s top exporting country of wheat, representing 21% of the global wheat trade. See Figure 2.

All of that is to say that what goes on in Russia greatly matters to the global and US wheat markets. This will continue to be the case in the years to come, as Russia continues to pump billions of dollars into new export terminals and facilities. This year, Russia had its second largest crop ever (though much like the US corn crop, it did fall below initial expectations due to tough weather during the growing season). Global wheat supplies outside of Russia are comfortable as well, with the USDA reporting record ending stocks for the 2020/21 crop year.

With large global supplies and a good Russian crop, why were prices rallying? And what is behind the decline?

Russian weather has been very dry through the fall (the worst drought in over a decade). This is impacting farmers’ ability to plant next year’s crop. All through September and into October, dryness was slowing planting and there was real concern that the 2021/22 crop would be a bust. Prices were up considerably in Russia and the US during this time.

The break in the market came following rains in Russia (and some in the US Plains as well) that boosted hopes that farmers would be able to catch up on planting ahead of winter dormancy. Prices have not fully taken back all of the recent gains, but continued improvements in weather before winter would go a long way to bring prices back down.