February 26, 2021
World wheat production in 2020/21 is projected to be a record 28.4 billion bushels, which is 349 million bushels higher than production in 2019/20. 2020/21 world wheat use is projected to be a record 28.3 billion bushels. This is 821 million bushels higher than during the 2019/20 wheat marketing year.
World wheat production is still projected to be higher than world wheat use, and world wheat ending stocks are projected to increase to a record 11.2 billion bushels. Yet, above average wheat prices may be here for a while.
While world wheat ending stocks increased, U.S. wheat ending stocks declined from 1.028 billion bushels in 2019/20 to 836 million bushels in 2020/21. U.S. hard red winter (HRW) wheat ending stocks declined from 506 million bushels to 362 million bushels.
The two major reasons for the decline in U.S. wheat stocks are Russia’s plan to increase wheat stocks by restricting wheat exports and increased demand from wheat importers.
To reduce the increase in Russian wheat prices and to build Russian wheat stocks, Russia is implementing an 82 cents per bushel (25 Euro per metric ton (tonne) export tax. Reports indicate that the 82 cents per bushel tax may be increased to $1.64 per bushel and that a permanent tax formula will be implemented on June 2, 2021.
The export formula is reported to be 70 percent or the difference between the “global wheat price” and a base price of $200 US per tonne. For example, a global wheat price of $286 per tonne implies a tax of $60.20 per tonne ($60.20 x 0.027216 = $1.64/Bu.). (Each week, the Russian Ministry of Agriculture will calculate the export tax using the previous week’s “registered export contract price data.” No one knows how the base price will be calculated. My guess is they will use Black Sea FOB export prices.)
In anticipation of the 82-cent Russian export tax, Russian wheat farmers and exporters rushed to sell wheat while importers of Russian wheat rushed to buy wheat, resulting in higher wheat prices.
When implemented, the tax will reduce Russia’s wheat exports, effectively reducing the world’s wheat supply and resulting in higher world and U.S. wheat prices. At the beginning of Russia’s marketing year (August 1), the FOB Black sea wheat price was $220 US per tonne ($5.99/bu). The Black Sea price peaked at $300 ($8.17) and at this writing is $286 ($7.79) per tonne.
U.S. hard red winter (HRW) wheat stocks have declined. The tightening of HRW wheat stocks resulted in a declining spread between the HRW wheat price and the soft red winter (SRW) wheat price. On August 3, 2020, SRW wheat prices were 92 cents higher than HRW wheat prices. Currently, the spread between HRW and SRW is 16 cents. Available HRW wheat (bread flour) has tightened up significantly more than SRW wheat.
Another factor that may support the continuation of higher wheat prices is world corn and soybean demand. Nearby corn futures contract prices have increased from $3.15 in early August to $5.65 at this writing. The $2.50 price increase shows the need to increase corn planted acres. The corn market is attempting to buy acres from soybeans, cotton, and wheat.
Since early August, soybean futures contract prices have increased from $9 to $14. Soybean prices indicate the need to produce additional soybeans. The soybean market is protecting soybean acres.
Hard red winter wheat futures contract prices have increased from $4.20 to $6.40, indicating a need to produce more HRW wheat. The wheat market is protecting wheat acres and to do that, wheat prices must compete with corn and soybean prices.
Above average wheat prices may be here for a while.
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