On August 15, Russia and Ukraine (Black Sea) sold 10.8 million bushels of 12.5 percent protein wheat to Egypt. The average price, FOB (free on board) Black Sea, was $202.18/metric ton (MT) and $218.97/MT CIF (cost and freight). The cost per bushel of wheat delivered to an Egyptian port is $5.96/bu. The wheat is to be delivered between September 15 and 30.
Sea freight cost from Houston, Texas to an Egyptian port is about 82 cents per bushel. To compete with Black Sea wheat, U.S. wheat would have to be $5.14 FOB Houston. Moving wheat from truck or rail to the vessel costs about 18 cents, which makes the spot rail/truck Houston price $4.96.
The price spread between the central Oklahoma/Texas Panhandle and spot rail/truck Houston is about $1.20. This means for Oklahoma or Texas wheat to compete with Black Sea wheat for export, the Oklahoma/Texas wheat price needs to be $3.76 ($5.96 - $0.82 - $0.18 - $1.20)
The Black Sea wheat exported to Egypt was a minimum 12.5 percent protein. The average protein for 2019 harvested Oklahoma/Texas wheat was 11.3 percent. The current KC wheat basis for 11.3 percent protein is $1.03. The KC basis for 12.5 percent protein is $1.30. Subtracting the protein premium (27 cents) produces a competitive Oklahoma/Texas price of $3.49.
At this writing, the Dacoma, Oklahoma cash price is $3.69, and the Perryton, Texas cash price is $3.60.
The $3.49 competitive price is for the North African (Egypt # 1 wheat importer, Algeria # 3, etc.) market, where the Black Sea exporters have about a 40-cent ocean freight advantage. The sea distance from a Black Sea port to Egypt is about 1,400 nautical miles (42 cents). The sea distance from a Texas port to Egypt is about 6,800 miles. (82 cents).
Japan and the Philippines are major U.S. wheat importers. From a Texas port to Japan is about 9,500 nautical miles plus Panama Canal charges. The sea distance from the Black Sea to Japan is about 9,000 miles plus Suez Canal charges. With nearly equal sea freight costs to Japan, the competitive Oklahoma/Texas price would be about $3.89.
The only market that Oklahoma/Texas wheat has a transportation advantage over competing hard wheat exporters is Mexico. Argentina, and to a limited degree, Brazil still compete with the U.S. for Mexico’s wheat market. During each of the last two years, Russia has delivered one cargo of wheat to Mexico.
Black Sea exporters export about 50 percent of all the world’s hard wheat exports and 35 percent of the world’s total wheat exports. The Black Sea wheat exporters’ percentage of the world’s wheat export market is not expected to decline.
Another problem for U.S. hard red winter wheat exports is that Black Sea exports may have saturated the market with hard red wheat. Thus, when Black Sea exporters run out of exportable hard wheat, importers tend to buy soft red winter wheat rather than hard red winter (HRW) wheat.
The 2019/20 wheat marketing year world wheat production is projected to be a record 28.2 billion bushels. Ending stocks are projected to be a record 10.5 billion bushels. The only good news is that record wheat use produces a slightly lower stocks-to-use ratio.
Oklahoma/Texas wheat producers need to adapt to wheat prices that average about $5.00 and that, without adequate protein, dip below $4.00.