“Wheat prices have no potential for further decrease after the descent of the last few months; this is especially true given that today’s prices in Russian ports are very much lower than prices in the country’s interior. Even in Russia, prices are flirting with levels at which production margins for farmers will shrink significantly. Thus prices will need to increase during the coming months, with rising Black Sea wheat prices leading the pack and triggering upwards pressure elsewhere. Potential price growth would be amplified if harvest outlooks deteriorate further in Argentina and Australia.”

Andrée Defois President Stratégie Grains / Tallage Wheat users hoping for world prices to fall even lower are likely to see their hopes dashed. Today’s prices are already low whereas demand is expected high and several uncertainties exist in relation to supply.

Global wheat production nevertheless rebounded strongly this season in the wake of the very good harvests in Europe (+12%) and better yields than last year in the Black Sea countries (essentially Ukraine), India, China and the Middle East. In Australia, this year’s harvest should still exceed last year’s catastrophic result, although the outlook is hardly spectacular because of the continuing drought, especially severe in the country’s eastern regions. In Argentina, with larger wheat area than last year, potential production had retained – until now – a good chance of exceeding last year’s level; however, the dry weather in September and now a fall in temperatures are in the process of quashing this once favourable outlook. Furthermore, the situation in North America is also a source of concern: the spring wheat is still being harvested because of the excessive rainfall that in turn could also harm grain quality – particularly in Canada. Consequently, global wheat production is expected to increase by around 35 million tons (Mt) to 735 Mt (+5%). However, this growth is smaller than originally envisaged, the last few weeks having seen production forecasts tumbling further.

ROBUST DEMAND Global demand for wheat is on rise this year. It is important to take this phenomenon on board because the additional consumption that the world’s exporters will need to service during 2019/20 stands at almost 20 Mt: one half of the increase concerns animal feeds, whilst the remainder relates to the milling, starch and ethanol industries.

GROWING INDUSTRIAL DEMAND Rising industrial demand for wheat in the starch and ethanol industries is centred for the most part on Europe. Tumbling wheat prices have reinvigorated margins over cost for producers of wheat-based ethanol; essentially, this is the case in the UK, where the wheat price has fallen sharply in tandem with this year’s very large harvest and the necessity to liquidate as much merchandise as possible during this first part of the new marketing year whilst trading regulations remain certain (before the situation is muddied by the troubled waters of Brexit). Demand for wheat in starch production is growing on account of expanding production capacities in the northern and eastern parts of the EU.

RISING DEMAND FOR HUMAN CONSUMPTION AND MILLING In milling, Europe is not taking the lead: on the contrary, the outlook for European millers is fairly morose because a number of countries (mostly in Africa) are reducing their imports of European flour as they develop their own flour producing sectors. By contrast, wheat requirements for milling are projected to rise in sub-Saharan Africa (+1 Mt), the Middle East (+0.8 Mt), Southeast Asia (+1.6 Mt), India (+1.3 Mt) and South America (+0.7 Mt) after stagnating, or falling, in 2018/19. This was partly because some countries were unable to secure their usual supplies of grain in 2018/19 due to conflicts or economic problems.

Furthermore, some Asian countries (Bangladesh, for example) prioritised consumption of rice over wheat for reasons of cost. Structural growth in demand for human consumption (in line with rising populations in Africa and changing dietary habits in Asia) combined with larger wheat harvests in countries with limited importing capacities (various Middle Eastern countries and Afghanistan, for example) should permit growth to re-establish this year.

HIGHER DEMAND FOR WHEAT IN ANIMAL FEED SECTOR With supply on the rise, wheat becomes more easily accessible, especially in terms of direct on-farm consumption by animals. But wheat’s position as an ingredient in industrial animal feeds is also flourishing because its price – although higher than the price of maize – is much more competitive against other compound feed ingredients than last year. Despite the African swine fever epidemic in Asia having severely reduced the total animal feed requirement, an additional 10 million tons of wheat is still set to be consumed in the animal feed sector globally between now and mid-2020.

STRONG TRADE AND LOW STOCKS Consequence: global wheat trade should surge during 2019/20 (by around 9 Mt to 164 Mt). This will push the Black Sea countries as well as Argentina, Australia and the EU to export the totality of their availabilities (after covering their domestic demand).

On the other hand, US wheat is currently too expensive compared with its Black Sea or EU rivals on export destinations in Africa and the Middle East. Thus, little hope exists that the USA could export more wheat at current prices than last year.

With Russian exports currently projected at 34.5 Mt and Ukrainian exports at 19.1 Mt, carryout stocks in the two countries on June 30, 2020, are set to be small. The stock outlook is the same for Kazakhstan, whist Australia, Canada and Argentina are all expected to finish the marketing year with smaller inventories. Carryout stock in the EU could exceed last year’s level to a small extent, with its inventory comfortable but not in surplus.

Thus, despite the continuing existence of significant stocks in the USA, inventories held by the main wheat exporters will decline in 2020 on account of the growth in global demand. On June 30, 2020, global reserves are projected to equal 105 days of consumption in comparison to 115 days in June 2019, 122 in 2018 and almost 130 in 2017. When all the countries of the world are included, the global inventory will contract at a slightly slower pace, but even so, stocks equal to almost 10 days consumption will have been lost in the space of three years.

WHEAT PRICES SET TO INCREASE THROUGH MARKETING YEAR This context therefore suggests that wheat prices have no potential for further decrease after the descent of the last few months; this is especially true given that today’s prices in Russian ports are very much lower than prices in the country’s interior. Even in Russia, prices are flirting with levels at which production margins for farmers will shrink significantly. In France, the current price of 168 €/t FOB Rouen corresponds to a farm-gate price of 150-155 €/t, which barely covers the variable costs of production (such as fertilizers, crop protection and seeds).

Thus prices will need to increase during the coming months, with rising Black Sea wheat prices leading the pack and triggering upwards pressure elsewhere. Potential price growth would be amplified if harvest outlooks deteriorate further in Argentina and Australia. Moreover, given that wheat is competing fiercely with maize, any increase in maize prices would boost the increase potential for wheat prices. This could happen if unfavourable events impacted maize sowing and/or harvesting in South America, or if the USDA were to further reduce its corn production forecast for the USA. Measures introduced by Argentina to counter the country’s economic crisis in the context of a more interventionist political framework will also need to be closely followed. If Argentina – now a key exporter on the world market – reduced its exports, then wheat prices in other parts of the world could climb. Lastly, if the tensions in the Middle East result in a durable hike in oil prices, demand for ethanol could rise – in turn strengthening the increase potential for wheat prices.

Nevertheless, it is important not to loose sight of the bearish factors that exist, namely the heavy global barley and maize markets in 2019/20 and the fact that the prices of these two grains – caught in a battle to capture demand – will stay low (assuming no bad weather impacts on the harvests). Maize and barley will act as a moderating influence, limiting but not preventing the rise in world wheat prices; meanwhile if current economic or financial troubles worsen in various importing countries, the impact on wheat price growth would also be bearish.