For U.S. wheat, it’s all about price. And specifically, how does our delivered price to foreign buyers, what’s termed a CIF price, compare to our competitors. Unlike corn, or even soybeans, the list of possible wheat competitors is lengthy and comes from all corners of the globe.
The EU, Russia, Ukraine, Australia and Canada all, at some level, exert important influences on global pricing.
This year on wheat, a number of those key supply markets have had production problems:
- EU’s production went from 151 MMT in 2017 to 138 MMT this year, a drop of 13 MMT
- Russia’s production went from 85 MMT in 2017 to 70 MMT this year, a drop of 15 MMT
- Ukraine’s production went from 27 MMT in 2017 to 25 MMT this year, a drop of 2 MMT
- Australia’s production went from 21 MMT in 2017 to 18 MMT this year, a drop of 3 MMT
- Canada was the exception seeing production increase from 30 to 32 MMT, an increase of 2 MMT
On the demand side, the major buyers are Mid-East and North African buyers, with Egypt usually garnering the most attention from their central buying authority, the GASC, buying all the county’s wheat needs thru public tenders. As such, whether the U.S. sees much export action in a given year depends crucially on how well we can ship grain into Egypt at lower prices relative to our competitors.
The chart above shows U.S. CIF wheat prices delivered relative to the Russian CIF wheat price delivered to Egypt.
The chart below is the spread in freight rates to Egypt for the U.S. relative to Russia.
Here are some of the key takeaways:
- U.S. CIF prices have increased relative to Russia by $10/MT since 2005. Although there clearly is a lot of variation. This means it is increasingly difficult for the U.S. to find exports flowing into this important demand region.
- The $10/MT increase in the CIF price spread is wholly and completely a result of freight increases for U.S ocean rates into Egypt. In other words, it’s not that Russia is seeing falling prices but instead they are garnering that markets because freight costs are pushing U.S. prices out of the game.
- The last time the U.S. saw any meaningful business to Egypt was in 2010 when we sold 4 MMT thanks to a massive drought that kept Russia out of the export market. This year, we did our first deal to Egypt for 50,000 MT.
- In the near-term, Russian prices have begun to climb relative to U.S helping improve the US-Russia CIF spread. Furthermore, the freight spread is well above trend. With energy prices having the potential to fall, this could further lower U.S. freight relative to Russia, and thereby improve the U.S. reach. Oil prices fell about 1 percent on Friday and U.S. crude prices are on track for the longest stretch of daily declines since 1984. This should help ease the inequity in freight spreads going forward.
U.S. wheat export business has shown a nice uptick in recent weeks.
We think it continues to grow and Russia’s aggressive export program starts to wane. But, USDA still has a lofty goal of 1,025 MB for the year which we believe will be a challenge to meet. As such, we think wheat price upside potential is limited and August highs will be difficult to achieve.
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