Australia: high prices, escalating demand a potent combination

The Russian invasion of Ukraine may be less than two weeks old, but it, combined with the wide-ranging financial sanctions imposed on Russia by the West, has sent global grain supplies into turmoil and pushed wheat values to their highest level in 14 years.

The Black Sea region accounts for around one-third of global wheat exports each year. The conflict has seen trade out of the Black Sea region grind to a halt due to port closures, sea mines, and the skyrocketing cost of insurance for vessels entering the region. Many shipping firms have suspended sailings to affected Black Sea ports.

Since the invasion began almost two weeks ago, missiles or mines have hit at least five commercial vessels. An Estonian-owned cargo ship hit a suspected mine and sank off Ukraine’s major Black Sea port of Odesa last week with four crew members still missing. This occurred just hours after a Bangladeshi vessel was hit by a missile while anchored at the port of Olvia, killing one of its crew members.

The May wheat contract on the Chicago Board of Trade (CBOT) locked limit up for the third consecutive day on Friday of last week, closing at a mouth-watering US$12.09 per bushel (AU$602.70 per tonne). Since the market traded limit down on Friday of the previous week, the contract has added US$3.4925/bu (AU$152.30/t), or 40.6 per cent, in five trading sessions. The contract low for the year was set on January 14, and since then, it has rallied 62.4 per cent, or US$4.645/bu (AU$231.50/t).

As a result of the extreme volatility, the CBOT has announced new daily price limits for wheat which came into effect yesterday, and will run until May 2022. The current limits of US$0.50/bu expandable to $0.75/bu will be amended to $0.85/bu expandable to $1.30/bu pursuant to exchange rules.

Should two of the first five listed non-spot contracts or the May contract settle at limit, the daily price limits for all contract months shall increase to $1.30/bu the next business day. Price limits shall remain expanded until all contract months subject to a daily limit do not settle at the expanded limit. At that point, daily limits for all contract months shall revert to the initial price limit on the following business day.

The challenge for wheat consumers worldwide is that stockpiles are already tight. And not only does the conflict jeopardise grain exports from Russia and Ukraine for the balance of the 2021-22 marketing year, it also threatens the spring and summer crop plantings in Ukraine as well as the new-crop harvest.

The supply shortages are likely to continue well into the 2022-23 season and potentially beyond, depending on how long the war lasts. The longer it lasts, the more protracted the likely supply disruptions become. Demand for European Union wheat has surged since the conflict began. Algeria will now allow French imports after excluding its traditional supplier in October last year, following comments from the French President that offended the government in Algiers.

There were some unusually large export sales reported last week from Romania, Bulgaria, France, Germany, Poland and several other EU countries as consumers canvass alternative origins to satisfy nearby demand. This pressed Hungary to take the extraordinary step of immediately banning all grain exports to secure domestic supplies, as prices soared following the Russian invasion. And I doubt this will be the last country to take such action.

Bumper harvests will be required in other Northern Hemisphere jurisdictions such as the European Union, Canada and the United States in the second half of the year to tame the supply issue. While it is still early days with the winter crop just emerging from dormancy in many regions north of the equator, we do know that the drought across the US Southern Plains is expanding, and US winter-wheat production is likely to be below average this year.

In France, the EU’s biggest wheat producer, an estimated 93pc of the country’s soft wheat crop is in good-to-excellent condition as of February 28. According to France AgriMer, this was on a par with the
previous week, but was 5 points higher than week eight last year. The winter-barley crop was rated 90pc good to excellent, down 2 points on the previous week, but 6 points higher than the same week in 2021. Planting of the spring barley crop was 36pc completed compared to 28pc in week 7 and 47pc a year
earlier.

Elsewhere in Europe, the winter crops in Germany, Britain, Poland and the Czech Republic are all in good condition and have largely avoided any frost damage thus far. Germany’s winter-wheat area has increased 0.4pc year on year to 2.87 million hectares (Mha). The wheat area in Britain has increased 1.3pc this season to 1.8Mha, and in Poland, it is unchanged at 2.1Mha. Conversely, soft wheat plantings in France are down 4.3pc to 4.75Mha compared to the 2020-21 season.

Meanwhile, China’s agriculture minister reported over the weekend that the condition of the country’s winter-wheat crop could be the “worst in history”. Unusually heavy rain in the autumn of 2021 seemingly delayed planting of around 33pc of the intended area. A survey of the winter-wheat crop taken late last year found that the area rated good to excellent was down by more than 20 percentage points compared to a year earlier.

The timing of these comments is quite surprising, given the escalating Black Sea supply issues and drought in the US. Wheat prices in China soared to a record last week, topping 3000 yuan/t for the first
time, highlighting the concern over domestic grain stocks. According to local reports, the Ukraine crisis was an influence, but the internal supply-and-demand imbalance remained the fundamental reason behind the rally.

Wheat stocks held by Chinese traders and farmers were drawn down sharply in 2021 after local corn prices jumped to a rare premium over wheat, triggering millions of tonnes of wheat consumption by stockfeed manufacturers. While wheat prices regained a premium over corn late last year, the demand damage was already done. The government continues to auction wheat from state reserves to cool domestic prices, but volumes have dropped from 4Mt at some auctions last year to around 500,000t per auction more recently.

Increased Chinese import demand for wheat combined with Northern Hemisphere supply issues is music to the ears of Australian farmers. The events in Ukraine are heartbreaking, but the world still needs to eat. Demand for Australian grain was strong before the conflict, but inquiry has ratcheted another notch this month. The pressing question becomes: where will Australia find the additional export logistics and elevation capacity to meet the rising demand?

Tags: Russia, export, prices, Black Sea region, wheat, global grain supplies, Ukraine