Last summer, the worst drought in many decades slashed FSU wheat output. Major exporters Russia, the Ukraine, and Kazakhstan saw 2010-11 production fall from the previous season by 33%, 43%, and 19% respectively. Exports for 2010-11 fell from 37 million tonnes, or 27% of world trade, in 2009-10, to 13 million tonnes, or 10.5% of world trade. Russian exports, normally the largest of the group by far, tumbled to 4 million tonnes, down from 18.56 million tonnes in 2010-11.
In response, the Russian government instituted an export ban to avoid domestic shortages and to keep prices from spiraling out of control. On May 30, with an anticipated recovery in grain crops, the government announced that the export ban would be lifted as of July 1.
The market reacted swiftly, shedding as much as much as 50¢ per bushel over the next few sessions. Will Russian wheat exports now flood the market and mark the end of the bull market?
There is no question as to whether this development was bearish – clearly, it was. The degree of bearishness, however, may have been overstated. There was never really any doubt that the Russians would allow wheat exports. The total lifting of the ban, however, was something of a surprise to the market, and that was what the market reacted to.
Early press releases were ambiguous regarding the amount of wheat that was involved. The estimates for total Russian 2011-12 exports that we’ve seen range between 13 million tonnes and 15 million tonnes. That compares with the USDA’s estimate of 10 million tonnes contained in the May crop report. So the additional amount of wheat that would otherwise have become part of Russian ending stocks was 3 million to 5 million tonnes.
There are several reasons why the end of the ban might have only a limited impact on world trade. First, the wheat that the Russians are going to sell abroad is generally of lower quality and does not address the problem of low global inventories of food-quality milling wheat. The highest quality wheat in the US is hard red spring wheat, traded at the Minneapolis Grain Exchange. Since the European drought began to develop last summer, the spread between Chicago Board of Trade wheat – which represents a broad basket of deliverable grades – and Minneapolis wheat has gone from flat to over $2.40 per bushel! So while a few million tonnes of Russian wheat will alleviate tightness in one sector of the market, it will do little for the void left by last year’s drought and the sub-par Australian crop.
Second, the Ukrainians replaced their wheat export quotas with an export tax, which effectively means that there are still export restrictions for the broader FSU market.
Furthermore, winter wheat weather in the US, France, and Germany has stressed crops in many regions, which leaves the strong possibility that output estimates will be revised downwards in the June 9 USDA crop report in these key producing nations.
The USDA presented its first look at the 2011-12 marketing year in the May 11 crop report. Ending stocks are forecast at 181 million tonnes, or 27% of usage. That compares with 30% and 27.5% for 2009-10 and 2010-11, respectively. While global inventory levels are set to fall again, they are still above the mid-decade lows that triggered the bull market. Nevertheless, we have dipped back into vulnerable territory in which any single-country crop crisis would be enough to create tightness, and, indeed, draw inventory levels down to dangerous levels. Moreover, USDA estimates lump all grades of wheat together and do not tell the whole story regarding the drop in the ratio of milling quality wheat to lower quality grades.
Remain long Chicago Board of Trade and Kansas City Board of Trade wheat. Place sell stops, basis July, at $7.20 and $8.40 per bushel, respectively.