wheat

Russian political landscape is evolving in ways that ought to reshape the conventional way we view wheat global price discovery. You may have read news about two major firms electing to leave Russia this week.  Root of business decision looks to be about abandoning grain origination.

Russia looks to be positioning itself for greater control over domestic grain trade.   Yet anybody could still buy free-on-board (fob) port.  Coming through lens that duration of war and sanctions could be lengthy, think Russia is slowly metamorphosing businesses to circumvent existing sanctions.   Adage to become, you want our cheap grain, you’ll have to do it with our transportation and internal payment & pricing terms.   Russia just needs time to change it.

Think of a two-tiered price grid.  Those importers who are on good political terms with Russia and can operate without offending the West, ought to be able to access that market in a more predictable way with cheaper price. This loop ought to lack transparency.  Those who are not on good political terms with Russia or don’t want to risk offending the West, or want specific quality attributes, will be dependent on next layer of a more expensive price choice and origins.  Many operate this way already.

Russia looks poised to cozy-up with China and others, and anytime that occurs, price and transparency dilutes, so does predictability.   Russia still needs to export wheat, but the composition of how and who is at risk of changing in coming years.

The two most important fundamental components of wheat are not necessarily common topics within coffee-shop talk, it is that

(1) both Russia and Australia have large enough sized crops to be able export volume (capped by capacity) right through respective 2023 harvests begin.  Cheaper price ensures this happens, Russia leads in Africa/Mid-East while Australia in Asia.
(2) user behavior has shifted to combat high price, part of it is deploy patience, even hope that a cheaper choice will become available.

Where domestic supply/demand imbalances exist, strong basis and futures inversions can do most of the work.  Can come up with a few reasons for modest strength including return of disruptive war or corn drought, but the likelihood of reversion to a price uptrend seems low.  Bounces yes, uptrend unlikely.

It’s too early to know if the Hard Red Spring wheat story is only about volume, protein or both.  Volume for sure as North American spring wheat beginning supply is poised to be the lowest since 12/13 (for now), but protein can come into play because US Hard Red Winter protein is weak.  The last US spring wheat wreck was 2017 and it was a low HRS & HRW protein year.  Stress ups odds for higher protein HRS outcome and can skew price discovery.  Typically when in prime weather chaos, going with perception of crop size getting smaller or bigger is useful.  But keep in mind that this isn’t the first high priced HRS rodeo that millers have been too, and that spring wheat is the only imbalanced world wheat class.

Research on this just completed.  Please contact me for more detail.

There’s a little more going on in wheat than meets the eye. It’s not the first time that Russia has initiated an export tax, last one being in Dec-2014, but market conditions then were different. Russia price grid adjusted inclusive of farmer accepting lower price because importers had ample wheat buying choices. Like most years, that was a supply-push year. Not so today. Most important observation is this. Statistics or supply/demand’s won’t convey it, but wheat market dynamics have shifted to a rare seller’s market.

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