Is there a shortage of wheat?
How much of the global wheat supply comes from Russia and Ukraine?
Where does wheat form the Black Sea region go as an export?
Can the U.S. substantially increase production to keep commodity prices in check?
Is there enough wheat seed to plant?
Can we start getting ahead of the curve on food aid around the world?
What is Russia’s contribution as far as fertilizers?
What price changes will we see as a result of lack of wheat and/or fertilizer from the Black Sea region?
The spring session at Wild Dunes Resort in Isle of Palms, South Carolina, US, provided milling and non-milling members of NAMA background information and analysis on wheat, a commodity in which Russia and Ukraine provide 14% of global supply, and corn, production of which is important to Ukraine but negligible in Russia.
Ukraine, one of the biggest countries in Europe and the 45th largest in the world, features a land area roughly the size of the US Central states stretching from Chicago, Illinois, US, to New York City, from Toronto, Ontario, Canada, to Raleigh, North Carolina, US. Half of that land is devoted to agricultural endeavors that employ about 15% of the population compared with 3% of the US population. Wheat is produced throughout Ukraine, but most production takes place in the eastern areas, currently a hot spot for fighting, Lardy said. That’s unfortunate for grain since the region is a key southerly logistical route for crops to ocean-going ports, which are closed indefinitely and will require extensive rebuilding.
“Even if a peace treaty was signed tomorrow, there’s infrastructure that has been damaged and going to need to be replaced,” Lardy said. “The longer the war goes on, certainly the more destruction takes place, but there’s still going to be this period after the fact that’s still going to take a lot of time to get resolved.”
The USDA has reduced production and export projections in Ukraine for the current marketing year but eliminated neither. That’s because Ukraine already shifted a significant portion of its wheat and corn crops before Russia invaded, Lardy said. Whatever remains in storage has the advantage of most easily feeding the populace compared with corn, which goes to feed animals that in turn provide food. As for new crop, Ukraine is a few months out from a winter wheat harvest and, under normal circumstances, their supplies would hit the market in July-September. This year, Ukraine likely won’t be able to sell or ship any wheat in that period.
“We can see this on paper now, but when are we really going to start to feel the impact of this?” Lardy asked. “When the boats aren’t there, when the product doesn’t arrive, when people reach for the panic button, that’s when we’re really going to start to feel the lack of those shipments really kicking in.”
On the other side of the territorial dispute sits Russia, which turned wheat into a front-and-center commodity over the past decade since the country was stung by depressed oil prices. Most Russian wheat is grown in its western region, adjacent to the conflict. As a major exporter of wheat, Russia now factors heavily into the “world grid” of supply, Lardy said, but the flow of wheat remains in a war-time haze for now. The USDA lowered Russian wheat export expectations by 3 million tonnes, to 32 million tonnes in February. To date, restrictions imposed on Russian exports by the United States and many other countries have yet to curtail their exports of food and fertilizer, he said.
“Is Russia going to be able to continue to export and have that system operate?” Lardy asked. “If they don’t, that changes the whole dynamic. And we’ve seen the futures market react, pricing in the uncertainty. But it has not priced in a calamity. The US futures market has suddenly become the international market for wheat prices. The Chicago Board of Trade represents 4% of the world’s wheat. But right now, it’s getting all the trade, it’s acting like it is the benchmark of world wheat prices. Rightfully, it probably should. There needs to be this risk premium in the market because if you take out one of the leading exporters in the world, where does that gap get filled?”
At least in part by Australia and India, Lardy said. In the case of the latter, India historically hasn’t exported much wheat. But its crop is considerable and the country is looking to significantly increase its presence in the world market, Lardy said. At the same time, China was expected to lift Russian import restrictions and provide a potential home for excess Russian capacity. If China takes in more Russian wheat, that leaves Australian wheat to go other places, he said.
But no matter how some wheat supplies find homes via atypical lanes and bring the market into relative equilibrium, the global wheat balance sheet is going to have some holes in it, he said. How the rest of the world treats Russia in terms of its financing is expected to dictate the path forward for the next crop year, Lardy said.
“The more severe the sanctions, the bigger the hole in the grid is going to be, and the bigger the hole, the firmer the price is going to be,” he said. “Every impact from this war is kicked down the road. The market has priced in the uncertainty. The 2022-23 crop is a calamity, and we don’t know how to price that yet. I don’t see markets going down until we see a signed peace treaty, and then I think we take a substantial chunk out of the wheat market the day that happens.”
