New players — in any industry — commonly employ a lower price strategy to capture market share.
In the wheat market, the true price is best determined by fair market practices, but several players have tried recently to be a low-cost alternative to the traditional five exporters.
Despite artificially low prices that increase export demand, production problems and fluctuating competitor prices have come back to limit the market share of these newer suppliers. But there is good news for buyers: higher quality wheat supplies are now positioned to fill the demand left unmet by the low cost competitors.
Russia has emerged as a major wheat exporter in the past 10 years, but is still working to achieve consistent production and export capability.
Significant weather events in two of the last three years have seriously setback Russia’s supply reputation.
In 2010/11, Russian exports fell to 3.98 million metric tons (MMT) from a record 18.6 MMT the prior year due to a 33 percent production decline.
The country rebounded in 2011/12 with a new record of 21.6 MMT in exports and 14 percent world market share, fourth highest among major exporters.
Yet, with another year of poor weather causing production to drop, the U.S. Department of Agriculture (USDA) expects 2012/13 Russian exports will total just 10.5 MMT, a 51 percent drop and just 8 percent of world market share.
Russian exporters used below-market-value pricing that spurred most of export sales in the first five months of this marketing year. As export supply dwindled, rumors of a government imposed export limit or outright embargo caused both producers and exporters to panic.
An effort to rush wheat sales before the government could implement restrictions contributed to a fairly steep — and unnecessary — discounting of Russian wheat.
From mid-July to mid-October, Russian wheat ranged from $300 to $345 per metric ton (MT), some $15 to $45/MT lower than competitive wheat supplies on an FOB basis.
As domestic and exportable supplies tightened, Russian prices increased while competing wheat prices declined. Russian exports effectively dried up in the second half of the year and the agricultural analysis firm SovEcon recently pegged the FOB value of Russian wheat just above $350/MT.
For a comparison, U.S. offers on March 15 from the Gulf were $293/MT for soft red winter (SRW) and $326 for 12.0 percent protein hard red winter (HRW).
The results of this price disparity means Russia’s domestic consumers are now paying a premium for their wheat when world wheat prices have dropped. In contrast, export customers like Egypt benefited from buying Russian wheat cheaply when world wheat prices were higher.
The other non-traditional player helping to shape the export market this year is India. The country is the world’s second largest producer of wheat but rarely exports significant quantities.
For five consecutive years starting in 2000/01, India exported at least 1.5 MMT, including a record 5.65 MMT in 2003/04. But since 2004/05, the country has exported between 23,000 MT and 891,000 MT each year, accounting for less than 1 percent of total world exports.
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This year, India is working aggressively to export surplus wheat supplies. Yet, significant quality concerns deter even the most price sensitive buyers from purchasing Indian wheat, even though the government-set minimum export price has been around $300/MT since early February, the lowest on the market at the time.
USDA does predict total Indian exports will reach a record 6.5 MMT in 2012/13. However, India cannot compete with higher quality wheat supplies unless it has a substantial price advantage.
The highest bid in India’s most recent export tender was $307/MT. In contrast, world wheat prices have fallen more than 10 percent in the past month and both U.S. and Australian wheat are at or below $300/MT.
As a result, Indian sales will likely dry up unless the current price dynamic shifts. India’s government is understandably hesitant to lower the price any further to compete in the export market. Although the calculations vary by source, Indian wheat exports at prices less than $315 to $325 FOB require the government to spend scarce budget resources to subsidize those exports because of their high domestic support price.
Besides costing money, subsidized exports violate India's WTO commitments. Those export subsidies are in addition to a minimum support price and production subsidies that are generally calculated to cover 40 to 70 percent of a grower’s fertilizer costs and 70 to 90 percent of irrigation and electricity costs.
To read more about India’s poorly managed wheat production system, visit Wheat Letter, March 6, 2013.
Both Russia and India demonstrated at different points this year that the lowest cost provider can attract a lot of business in a short period of time. These suppliers have also shown how quickly unstable and unpredictable government intervention can deter demand and distort market prices.
As we have said and will say again, the U.S. wheat store is always open with a reliable supply of high-quality wheat for any wheat food. And today, U.S. wheat is available the lowest prices of this marketing year, making it an even better deal for our overseas customers.
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