NAPERVILLE — Chicago wheat futures are hovering near the highest-ever levels for the time of year despite record global production prospects, but that optimistic crop forecast paints far too rosy a picture of the tighter wheat market setup.
Relative to demand, global wheat stocks in major exporting countries may drop near record-low levels by mid-2023 following mediocre harvests in some of those countries and severe disruption in Ukraine.
Top supplier Russia’s export share in 2022-23 is set to exceed 20% for the third time in history, a spike needed if prices are to ease. However, global sanctions on Russia over its actions in Ukraine, especially if they intensify, could push back on the export efforts.
CBOT wheat prices in the latest month have averaged about 16% higher than in the year-ago period and Paris-traded Euronext futures are nearly a third higher, but global demand is set to fall just fractionally this marketing year versus last.
That emphasizes the importance of successful crops and unhindered trade flows, particularly in the Black Sea region, where conflict has kept world wheat prices historically elevated since early 2022.
Most-active CBOT wheat futures on Tuesday reached more than two-month highs, surging almost 8% to $8.93-3/4 per bushel as Russian-installed leaders set out plans for the annexation of occupied Ukrainian territories.
This potential escalation may jeopardize the Ukraine export deal, now halfway through its 120-day renewable tenure. Grain shipments have increased from Ukraine’s vital seaports since the deal’s implementation, but volumes remain well below normal levels.
Market participants are already making large discounts to Ukraine’s export capabilities and especially grain production, which might worsen into 2023. Ukraine said Tuesday its 2023 wheat crop may reach 16-18 million tonnes versus 19 million in 2022 and 32.2 million in 2021.
The U.S. Department of Agriculture sees 2022-23 global wheat production up fractionally on the year to a record 784 million tonnes, driven largely by a strong Russian crop. That is despite a nearly 40% annual decline in the recently harvested Ukrainian crop.
In fact, USDA projects both production and exports out of Russia plus Ukraine to rise on the year based on the huge Russian volumes. This combined view is useful because some industry estimates of Russian wheat production include occupied areas of Ukraine.
Excluding Russia’s 91 million-tonne crop projection, USDA shows 2022-23 world wheat output dropping nearly 2% on the year, placing more weight on Russia’s crop success and its ability to access world markets. Global exports also drop by the same degree when subtracting Russia.
But finding dependable information from the region has recently been more difficult.
In previous years, Reuters reported Russian harvest progress data published weekly by the agriculture ministry, but those have been absent this year. This lack of transparency is unsurprising given that Russia in April suspended publication of trade data to avoid “speculation.”
USDA in August 2021 shuttered its Russian offices due to deepening tensions between Moscow and Washington, but the agency remained confident in its ability to provide reliable estimates. It is unclear if that has proven true.
Wheat traders’ moods heading into next year will also be influenced by Russia’s 2023-24 crop prospects, which are largely unknown right now. Farmers there should have already begun the sowing process.
World wheat stocks relative to use are set for eight-year lows, but the expected stocks-to-use ratio of 27% is not far off the long-term average.
China is routinely excluded from world wheat analyzes because of its small part in global trade compared with its massive stockpiles, which will account for a record 54% of global wheat supply by mid-next year according to USDA figures.
World-minus-China stocks-to-use for 2022-23 is pegged at 14.6%, the second lowest on record behind 14.3% in 2007-08. That is down from 15.9% the previous year and compares with a five-year average of 18%.
Wheat stocks-to-use drops to 13.8% in 2022-23 when considering only the major exporters, which account for nearly 90% of trade. That is also second lowest behind 13.1% in 2007-08 and down from 14.7% in 2021-22.
That major exporter ledger does not include India or Brazil, who have been increasingly relevant in global trade and could potentially expand that footprint. But adding them in does not change the previous conclusion: 2022-23 world wheat stocks-to-use is still set for a 15-year low.
China has an extra year’s worth of its wheat needs in storage as it stockpiles the grain for food security purposes. The world’s top wheat consumer and producer does not export its wheat, but global supply tightness could be solved in a jiffy if China were ever to change its policy. Karen Braun is a market analyst for Reuters. Views expressed above are her own.
(Editing by Richard Chang)