Russian turnround hits US wheat prices

From the state of Kansas, where he grows 2,000 acres of wheat, Jerry McReynolds watched with disappointment last year as the price of the grain kept falling. “It has dropped like a rock, unfortunately,” says the American farmer.

The cause had little to do with the drought that has wiped out much of the 2011 winter wheat harvest in Kansas, Oklahoma and Texas. Instead, Mr McReynolds’ bottom line was hit by a force thousands of miles to the east, where Russian wheat exports have poured through the Bosporus strait, depressing global prices.

The world’s wheat supply has gone from grave to plentiful, illustrating how quickly agricultural markets can turn with the seasons. Stocks are forecast to top 200m tonnes by mid-2012, the highest in more than a decade.

The price of wheat has eased, with CBOT soft winter wheat futures on Thursday selling for $6.53½ a bushel, down 24 per cent from a year ago. Plentiful wheat has also pressured corn prices as farmers feed it to animals, showing the perils of viewing commodity markets in isolation. Today a bushel of wheat is 19 cents more than corn; two years ago it carried a $1.30 premium.

The main drivers of change are Russia and, to a lesser degree, Ukraine and Kazakhstan.

In August 2010, Moscow imposed a year-long grain export ban as its worst drought in a century devastated crops. CBOT wheat rose to almost $9 a bushel, the highest since the commodity price spike of 2008, while countries such as Egypt, the world’s biggest wheat importer, sought alternative supplies.

Russian wheat exports plummeted to 4m tonnes, from 18.6m, in the crop marketing year that ended last June. The US, the largest wheat exporter, saw foreign sales jump by almost half.

But once the export ban was lifted last year, Russian farmers and international trading houses re-entered the market with alacrity. From July through December, Russia had exported 14.8m tonnes of wheat. Archer Daniels Midland, the US agribusiness, has emphasised how the export rebound boosted trading results.

“If we did not have a recovery in wheat in the [Commonwealth of Independent States], we would have been in a situation far, far different than the one we are in today. Luck hit,” says Abdolreza Abbassian, grain economist at the UN Food and Agriculture Organisation in Rome. Wheat, along with rice, are the world’s primary staple grains.

However, Russia’s wheat export boom may be set to slow. Russian officials last year suggested capping exports if grain shipments reach a record 23m-24m tonnes this year. Amy Reynolds, senior economist at the International Grains Council, a London-based intergovernmental group, says most people believe a new curb is unlikely to happen.

“But if it does, there’s no shortage of wheat anywhere else,” she says.

The US agricultural attaché in Moscow last week forecast a a “dramatic slowdown in exports” during the rest of the Russian marketing year, noting that exports from the three major southern growing regions “has largely finished”.

More pressure on wheat prices could be on the way. In the southern hemisphere, Australia and Argentina both had good crops. Global wheat supplies are anticipated to reach a record 690m tonnes this year.

In the US, the largest exporter, farmers added 3 per cent to land they planted with winter wheat, a crop to be harvested at midyear. In a strange twist, the drought in plains states such as Kansas may well lead to more winter wheat, after farmers ploughed under stunted corn fields and replaced them with wheat.

“Of all the crops we grow, wheat requires the least amount of moisture,” says Mr McReynolds, a past president of the US National Association of Wheat Growers.

Resurgent wheat supplies have also helped avert a dire situation for corn, a key input for animal feed and biofuels. Corn prices, while historically high, have dropped sharply from records near $8 a bushel reached last year as analysts disavow forecasts of critically low stocks.

“Ample supplies of wheat and the strong unexpected recovery in supply have definitely weighed on corn prices, and to some extent diminished the tightness we were anticipating,” Mr Abbassian says.

Wheat futures have gained 7 per cent in the past week as cold air settles over Russia and Ukraine, threatening to damage plantings that lack enough snow cover, forecasters Commodity Weather Group said in a note.

But fears over the weather and export policy will need to become more than mere speculation if they are to keep the rally going amid large harvests.

“We think that ultimately, prices get resolved to the downside,” says a longtime agricultural trader at a US hedge fund.