By Stephanie Bryant-Erdmann, USW Market Analyst
With fundamental factors well established, wheat futures markets thus far in 2016 are reacting mainly to changing government policies, notably those of Argentina, Egypt and Russia. Markets dipped when Argentina’s government removed export barriers. Prices rose and fell with each new rumor about the Russian export tariff, and fell again when Egypt’s muddled import requirements led to two cancelled General Authority for Supply of Commodities (GASC) tenders, slowing the pace of wheat imports by the world’s largest buyer. Over the next several months, we will watch and see how the markets reflect the consequences, both intended and otherwise, of those policy changes.
Argentina. In December, Argentina removed its 23 percent export tax on wheat, eliminated its wheat export quota and devalued its currency, all of which pushed Argentine wheat to the global market in a big way. According to Reuters, Argentine ports loaded 1.77 million metric tons (MMT) of wheat between Dec. 14 and Feb. 5. USDA pegs total Argentine wheat supply at 14.2 MMT and expects exports to reach 6.50 MMT in 2015/16.
Removal of the restrictive export policies helped Argentine farmers by giving them more market access. From 2012/13 to 2014/15, USDA estimated that ending stocks there climbed from 288,000 metric tons (MT) to 3.17 MMT due to increased usage of on-farm silo bag storage. This has given farmers a unique hedge this year because higher protein wheat supplies in Argentina are short and holding better quality wheat will likely mean more revenue. In marketing year 2015/16, USDA expects ending stocks to fall 57 percent to 1.36 MMT. Though the extent is still being determined, the recent export policy changes for wheat will also affect the Argentine flour industry. The International Grains Council (IGC) expects Argentina to be the sixth largest exporter of flour in the world in 2015/16; Turkey and Kazakhstan are numbers one and two, respectively.
Russia. With the U.S. dollar strengthening to 12-year highs in mid-January, and the Russian ruble plunging to record lows, Russian wheat gained competitive price strength. Russia produced 61.0 MMT of wheat in 2015/16, up 3 percent year over year. On Jan. 27, Russian officials sparked speculation by announcing it was examining its current wheat export tariff, but the government did not say if it would raise or lower the rate. While Russia has since announced that it will leave the export tax unchanged, further depreciation of the ruble will increase the tax due to the way it is calculated. On Jan. 21, Russian wheat prices offered for an Egyptian tender averaged $187/MT ($5.09/bu) free-on-board (FOB). The Russian export tax of 50 percent of the customs price minus 6,500 rubles ($83) per ton but not less than 10 rubles per ton on $187/MT of wheat adds roughly $10/MT.
Since 2008, Russia has restricted wheat exports three times, including the 2015 export tax increase, in order to control domestic food prices and inflation. The uncertainty about export policies and limited on-farm storage capacity in Russia create an incentive for Russian exporters to front-load their sales each marketing year to ensure they sell as much wheat as possible, regardless of price. In the first half of 2015/16, Russia exported 17.2 MMT according to SovEcon, a Russian consultancy. USDA predicts total Russian exports in 2015/16 will reach 23.5 MMT.
Egypt. After four weeks of debate, Egypt’s Agriculture Quarantine Authority announced that it would accept the GASC 0.05 percent ergot specification for imported wheat. However, GASC cancelled its most recent tenders after continued uncertainty forced traders to reevaluate the risk involved. All traders boycotted GASC’s first tender, then only a few bids came in on the second tender, each with a $10 to $20 per MT risk premium.
USDA expects 2015/16 Egypt domestic consumption to increase to 19.6 MMT, a 3 percent increase year over year. To meet the growing demand, Egypt is expected to import 11.5 MMT of wheat in 2015/16, a 4 percent increase from the prior year. About half of Egypt’s wheat imports go directly to production of subsidized flat bread (Baladi bread) to maintain the food security of its 92 million citizens. Reuters reported Egypt’s strategic wheat reserves would last until May 11, time Egypt’s government buyers can use to work on regaining trader confidence.
Markets will continue to adjust as the long-term implications of these policy changes become clear, but in the short-term, buyers and sellers need to weather the inevitable price volatility that always result.
2. Markets Still Rely on U.S. Wheat for Quality, Variety
Circumstances in today’s global wheat market are generating some breathless headlines. Plentiful wheat supplies, a strong U.S. dollar and record low freight rates are making it possible for Black Sea region, Canadian and Argentine exporters to sell more of their wheat at low prices in more markets around the world. While it is accurate to say U.S. wheat export volume is down, predictions of U.S. wheat becoming a second tier source of wheat rely on old perspectives of what is now a changing and highly segmented world market.
Total world wheat use and global wheat trade is growing and has set records in two of the past three marketing years. Much of that sustained growth is happening in markets that demand diverse types of wheat to produce premium ingredients in high-quality products. Unlike other wheat exporting countries and regions, U.S. farmers do not produce "generic" wheat. They supply six distinct wheat classes with excellent functional qualities and value for specific uses in specific end-product wheat foods.
That is why even under the current conditions, U.S. wheat exports are steadily increasing in markets that demand high quality. This is especially true in Asia and Latin America. These regions imported about 10 MMT of U.S. wheat in 1985/86, about 15 MMT in 2000/01 and just under 20 MMT in 2014/15. USW is seeing long-term value in these emerging markets and is adjusting its resources to help meet customers’ needs. In addition, customers recognize the U.S. wheat supply chain as the most reliable in the world; U.S. wheat buyers know they will face no risk from export taxes or other arbitrary government interventions.
It is a market development strategy that also provides value to U.S. farmers in the form of higher prices for their wheat compared to farmers in most competing countries.
“Trade paper headlines seem to imply the world wheat market is some kind of public competition — a race to see which country can claim the largest exporter position. I do not see it that way,” said USW Vice President of Overseas Operations Vince Peterson. “Selling wheat with consistently higher quality and a greater diversity of end-use applications is more complicated than a low-price strategy, but I think it is worthwhile for our overseas customers and our farmers.”
“We believe markets tend to correct themselves,” said USW President Alan Tracy. “Given population growth in markets that cannot grow their own wheat, increasing disposable incomes and growing demand for premium flour products in the quality markets we serve best, we are optimistic about future U.S. wheat production and exports.”
3. USW Lays Down Policy Priorities for Year Ahead
By Ben Conner, USW Deputy Director of Policy
A professor once told me this about achieving goals: “If you don’t write it down, it will never happen.” On behalf of the farmers we represent, USW takes a similar approach to our policy priorities: we write them down for the board to review every year. That happened again last week at the USW Board of Directors meeting in Washington, DC.
USW divides policy goals into three general categories: the World Trade Organization (WTO), free trade agreements (FTAs) and U.S. government policies. USW priorities in all three categories reflect our mission, which is ultimately to enhance the profitability of U.S. wheat producers and their customers.
The WTO category includes both trade enforcement and negotiations. A major policy priority is to ensure that wheat-producing countries follow WTO rules. Right now, a number of major developing countries are blatantly ignoring those rules, costing U.S. farmers in the form of lower exports and prices, and hurting their overseas customers in the form of more expensive domestic supplies. Studies conducted for USW estimated U.S. wheat farmers are losing more than $1 billion in revenue from domestic support policies in just four countries: China, Turkey, Brazil and India. Some of those countries have blatantly ignored WTO import rules in order to protect domestic wheat sectors. That is unacceptable and underscores the need to enforce past trade commitments. Similarly, our board supports negotiations through the WTO that create a more level playing field, but opposes rules that weaken current disciplines in the WTO Agreement on Agriculture or in continued negotiations under the failed Doha framework.
Free Trade Agreements are another priority. If the WTO negotiations remain at an impasse, aggressive market access gains will only come through bilateral regional sectoral trade agreements. The Trans-Pacific Partnership (TPP) is now signed and, hopefully, will soon be ratified by legislatures including the U.S. Congress. Beyond that, the wheat industry is hoping for rapid TPP expansion to other countries in the Asia-Pacific region as well as to new FTA opportunities.
Finally, U.S. government policies also affect U.S. wheat export potential. One of our priorities is on-going funding for the beneficial federal market promotion programs that — along with investment from state wheat commissions — help organizations like USW provide valuable services and information to customers around the world. USW also supports an end to the U.S. embargo of Cuba.
Now that we have written our 2016 Policy Priorities, it is time to make it happen. We are passionate about the profitability of farmers and their overseas customers, so we will be working hard to remove the policy obstacles in the way.