Markets

Wheat production under threat across globe

Grain Brokers Australia, May 17, 2022

Heavy rain has washed away topsoil on this crop of Sunflex wheat planted on Queensland’s Western Downs in early May. These seedlings are now showing signs of survival, but some just-sown paddocks in Queensland and northern NSW will require replanting, or will instead be sown to summer crops later this year. Photo: Jake Hamilton

IT IS tough to find a 2022-23 wheat crop anywhere that is currently getting bigger, with drought or flooding rains a common theme globally. So it was no surprise to see the United States Department of Agriculture take reduced supplies, lower domestic use, higher exports and reduced ending stocks in their 2022-23 wheat quadrella when the first cut of next season’s supply-and-demand estimates were released last week.

The latest World Agricultural Supply and Demand Estimates pegged global wheat production at 774.83 million tonnes, down from the current 2021-22 forecast of 779.29Mt. Domestic consumption worldwide is projected to be 787.52Mt, down from 790.79Mt in the current season. The exports forecast was 5Mt higher than 2021-22 at 204.89Mt, and ending stocks came in 12.7Mt lower than 2021-22 at 267.02Mt.

Indian figure surprises

One of the biggest surprises in the last week’s report was Indian production at 108.5Mt, down just over 1Mt from last year’s record harvest. This comes despite heatwave conditions reportedly decreasing yields in the main production states in the country’s north. Many analysts suggest the crop could easily be below 100Mt already, with 93Mt the lowest number I have seen published to date.

Not 24 hours after the May WASDE was released, the global wheat export number was abruptly pushed 8.5Mt lower, with the Indian government announcing a ban on wheat exports with immediate effect. A notice in the government gazette by the directorate of foreign trade, dated Friday, May 13, said a rise in global wheat prices was threatening the food security of India and that of neighbouring countries.

On Saturday, senior government officials announced that India would still honour exports backed by letters of credit already issued, and to countries that request supplies “to meet their food security needs”. The officials said that while the decision could be revised, unregulated exports had led to a sharp rise in the local price of wheat. They stated that India’s grain stocks are well above the buffer levels, and the decision to regulate wheat exports was taken largely to check prices and curb hoarding. Economics 101 says that is exactly what their actions will provoke.

Apart from problems with the weather-damaged harvest, India’s vast stocks of wheat – a buffer against domestic famine – were drained by the distribution of free grain to around 800M people during the coronavirus pandemic. In a normal year, the government’s food-welfare package usually requires around 25Mt to feed the 80M residents on the program.

Although not one of the world’s top wheat exporters, India has exported close to 10Mt since July 1 last year. The ban will undoubtedly be a bullish signal to the market, and could drive global prices to new peaks, given supply is already tight. This will hit the poor consumers in Asia and Africa particularly hard but could also severely impact India itself if this year’s production is so poor and its stocks are so low that it has to turn importer.

Governments across the globe are compounding the crisis with protectionism. Since Russia invaded Ukraine in late February, at least 20 countries have imposed restrictions on food exports, covering around 17 per cent of calories traded globally. Such trade restrictions risk setting off a domino effect, driving up prices for everyone.

Problems in North America, Europe

Meanwhile, the production issues are not restricted to India. Dryness across the US Hard Red Winter wheat area and floods in the Hard Red Spring areas suggest that the USDA yield, and therefore the US production forecast, could be optimistic. The winter-wheat abandonment is the highest since 2002, with Texas and Oklahoma the worst affected.

Up north in Minnesota and the eastern reaches of North Dakota, too much rain is preventing farmers from planting their spring wheat crop. As of May 9, only 2pc of the spring wheat area had been planted in Minnesota, compared to 93pc in the same week last year, and a five-year average of 50pc. The story in North Dakota is only slightly better, with 8pc planted against 63pc last yea, and a five-year average of 37pc. We will get to a point where the season will simply be too short to grow a crop, and the prevent plant area will soar.

The US spring wheat issues extend north into Manitoba, Canada, where massive snowfalls in April boosted soil moisture to such a degree that fields are now too wet for planting. A recent grower survey suggested that the spring wheat area would jump by 10pc to 7.37 million hectares, but this is now being jeopardised by wet fields and the forecast of excessive rainfall through to the end of May.

Ironically, on the western side of the grain belt, around one-quarter of Alberta’s cropland is still in the grips of drought, too dry to plant this year’s spring crops. These issues alone will make the USDA’s reversion to trend production for Canada in last week’s WASDE report a challenging ask this year.

In Europe, low rainfall in parts of France and Germany has brought the threat of drought, triggering a possible drop in European Union wheat output and exports and raising fears of a further squeeze on global supplies. The USDA’s Russian wheat output of 80Mt is achievable, but exports of 39Mt equate to 3.25Mt per month, around 60pc higher than the export pace since the invasion of Ukraine and the burden of Western sanctions. The Ukraine production and export estimates of 21.5Mt and 10Mt respectively are an optimistic guess at best for now.

Eyes on China

All that said, China’s wheat harvest commences next month, and it is possibly the biggest uncertainty facing the global wheat market in the coming months. It has been extremely dry for the past six weeks in much of the North China Plain, the key wheat-growing region of the country, accounting for 60-70pc of national production. There are reports of crops being cut for silage as the grain production prospects were poor. It is always hard to know what is happening in China, but if they say the crop is fine and immediately turn buyer, the game may be on.

Wet of concern in Australia

That leaves the Southern Hemisphere powerhouses of Argentina and Australia. The USDA pencilled the former in for 20Mt of wheat against domestic forecasts of 19Mt and a record of 22.15Mt in 2021-22. The USDA stuck its neck out big time for the latter, printing the highest ever first-cut wheat estimate for Australia of 30Mt. This is down from the USDA’s conservative 2021-22 number of 36.3Mt, itself a record but at least 3Mt shy of reality.

It is hard to disagree with the USDA at this stage of the campaign, with a better-than-average soil-moisture profile across almost the entire wheatbelt. The biggest challenge could well be too much rain, with parts of northern New South Wales and southern Queensland currently far too wet to get remotely close with a planter. Should that situation continue beyond mid-June, a substantial area will swing out of winter crop to an early summer-crop plant.

 

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