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Russia restricting wheat exports may not mean much

Russia's exports running about 13% below last year's export levels.

Reports indicate that Russia will limit its wheat exports. At first, this restriction may seem to have the potential to support wheat prices. In reality, this reduction in exports may be more than offset by increased exports from other countries.

During the 2017/18 wheat marketing year, Russia’s wheat production was 3.1 billion bushels, followed by 2.6 billion in 2018 and 2.7 billion bushels in 2019. Russia’s wheat exports were 1.52 billion bushels during 2017/18, 1.32 billion in 2018/19, and are projected to be 1.25 billion bushels in 2019/20. Even without limits, lower production resulted in lower exports.

Russia’s concern may be that its 2019/20 (July through June) wheat stock-to-use ratio is projected to be 11.3%. This implies that on July 1, 2020, Russia will have a 41-day supply of wheat in storage. A short 2020 wheat crop could result in significantly higher Russian wheat (bread) prices and potential unrest in Russia’s population.

Russia’s 2019/20 wheat exports are running about 13% (130 million bushels) below last year’s export levels (July through mid-February). Some analysts are projecting 2019/20 marketing year Russian wheat exports to be 1.2 billion bushels compared to 1.3 billion bushels during 2018/19 and 1.5 billion bushels in 2017/18.

Ukraine’s 2019/20 wheat exports are 27% (160 million bushels) above last year’s level. This more than offsets Russia’s, to date, 130 million bushel reduction in 2019/20 exports.

Australia may be the country that the market should be watching. Australia has experienced its third consecutive drought year. Wheat production declined from 1.17 billion bushels in 2016 to 769 million bushels in 2017, 636 million in 2018, and 573 million bushels in 2019. Exports declined from 832 million bushels in 2016/17 to a projected 301 million bushels in 2019/20.

A one-half billion (531 million) bushel decline in exports does not appear to have had a positive impact on wheat prices. However, a 500 million bushel increase in Australian wheat exports would very likely have a negative price impact. The drought is going to end sometime.

World wheat production appears to have leveled out at about 28 billion bushels. World wheat use has continued to increase but is still below production. Numbers for production and use in 2017/18 were 28.0 billion bushels production versus 27.3 billion bushels use. The 2018/19 production and use numbers were 26.9 billion bushels production versus 27.1 billion bushels use. Production for 2019/20 is projected to be 28.1 billion bushels compared to 27.7 billion bushels use.

 Because of economic development in the former Soviet Union countries and Eastern Europe, both the quantity and quality of agricultural commodities have improved. Thus, quality wheat is produced in a broader area around the world.

Take-home messages to consider: There is currently an excess of world wheat production. Australia’s situation implies that world wheat production could easily increase by 500 million bushels without a 500 million bushel increase in use. Below-average production in one country is often offset by increased production in another country.

Price increases such as the one that occurred in 2010/11 happen about once every 20 years. (Side note: Miracles do happen and if they do, how are you going to take advantage of the higher prices?)

Russian wheat exports may be restricted, but there is more than enough excess world wheat production to more than offset the export decline. The price impact of the restriction is expected to be limited.

BUT, any decline in wheat exports is one step toward higher prices.

TAGS: Outlook
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