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Black Sea drama carries into new year, but have the markets acclimated to tight supply conditions?

Jacqueline Holland, Grain market analyst

January 9, 2023

4 Min Read
wheat kernels and heads

Global wheat volumes remain at the tightest level since 2014/15. But over the past year, the world has adapted to exist in the tight supply space.

In the Southern Hemisphere, Argentina’s drought damage is likely going to be offset by a bumper crop fueled by plentiful rains in Australia. In its northern counterpart, European Union wheat exports from July through mid-December 2022 were reported at 5.5% higher than the previous year at 577 million bushels as buyers looked for the best pricing opportunities following last summer’s harvest.

And buyers are finally finding some price breaks on wheat purchases. Russian wheat export volumes flirted with record highs in December 2022, suggesting that more buyers may be opting to accept additional financial risks to take advantage of Russia’s bumper crop harvested last fall as Russia’s wheat supplies continue to be quoted at a discounted rate relative to other countries’ offerings.

Not only is Russia likely to ship the lion’s share of its massive crop in the coming months, but Ukraine is still racing to free up its exportable wheat supplies, which have been trapped for the past year. Ukraine’s wheat shipments in the first half of its 2022/23 marketing year were 47% lower than the prior year, suggesting that the two countries will not only continue to fight on the battlefield, but in the international export market as well.

The ongoing upheaval in the Black Sea will continue to offer some pricing opportunities, though those breaks are likely to be short-lived and are not likely to trigger price highs that would match last year’s unless severe fighting breaks out. Chicago wheat futures ended 2022 at $7.92/bushel, down 44% from March 2022 highs on the behemoth Russian crop. European futures (traded in Paris) closed 2022 down 29% from May 2022 highs.

Both futures contracts’ price declines represent more competition among originators amidst these tight supplies. But demand has also played a factor here as well – global domestic wheat consumption rates are 1% lower than last year as buyers respond to higher prices. Exporting paces are likely to make up for this dip in the total global wheat consumption volume, suggesting that markets are normalizing what we in the ag economy realm have dubbed, “a tight supply environment.”

The biggest opportunity for price movement ahead of Thursday’s USDA reports are likely to come from any skirmishes in the Black Sea. Russian attacks on the Ukrainian energy grid threatened to slow Ukrainian shipping paces as 2022 wrapped up, adding the most bullish energy to U.S. wheat prices since drought concerns took a bite out of winter wheat condition ratings last fall.

Weather worries

Weather conditions will likely continue to provide the most price activity for wheat prices through the early winter months, for better or for worse. Crops exposed to a sudden Arctic blast late in December had little snow insulation to protect them from frost damage, though the extent of the damage was not yet known at that time.

Plus, 91.75% of the High Plains stubbornly persisted in some sort of drought rating as 2022 winded down. La Niña winters aren’t known for providing the Plains with much moisture, so farmers will need to continue striking the delicate balance of forecasting a potentially smaller harvest and not overbooking any advance sales in the coming months.

While the U.S. is no longer a perennial wheat exporting power, its excess supplies still help to keep global buyers satiated as long as it is an affordable option. A stronger dollar has limited some of the U.S.’s export potential over the past year

Economic upheaval

The outlook for global financial and commodity markets as 2023 began seemed to be more uncertain than ever. Central banks around the world are likely to continue implementing interest rate hikes in the coming months to cool inflation. Higher interest rates will eventually slow the global economy – which is a bearish omen for wheat usage and prices.

Plus, the dollar continues to strengthen as soon as recession jitters creep into Wall Street, making wheat a less affordable option on the world market. U.S. wheat export paces continue to struggle in the high dollar environment, with marketing-year-to-date shipments lagging 3% behind year-ago volumes.

2023 is going to be a volatile year. U.S. wheat growers may look to mitigate price risks sooner than later this year to ensure profits and also peace of mind.

global wheat supply and demand pie chart

About the Author(s)

Jacqueline Holland

Grain market analyst, Farm Futures

Holland grew up on a dairy farm in northern Illinois. She obtained a B.S. in Finance and Agribusiness from Illinois State University where she was the president of the ISU chapter of the National Agri-Marketing Association. Holland earned an M.S. in Agricultural Economics from Purdue University where her research focused on large farm decision-making and precision crop technology. Before joining Farm Progress, Holland worked in the food manufacturing industry as a financial and operational analyst at Pilgrim's and Leprino Foods. She brings strong knowledge of large agribusiness management to weekly, monthly and daily market reports. In her free time, Holland enjoys competing in triathlons as well as hiking and cooking with her husband, Chris. She resides in the Fort Collins, CO area.

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