The pace of U.S. wheat export sales increased sharply in January with a narrowing of the price spread between U.S. and competing origins.
Given the steadfast advantages of quality, variety and reliability, the relative price of U.S. wheat today is certainly making it more attractive — and to more markets.
The many factors that contributed to the shift in world wheat prices seem likely to continue for the remainder of the marketing year.
The decision of the Russian government to lift its more than 10-month grain export embargo on July 1, 2011, ushered in strong competition to start the 2011/12 marketing year.
Then, estimates of world wheat supplies increased each month until hitting record-breaking world production, use and ending stock levels.
As a result, U.S. wheat prices have trended lower for nearly six consecutive months.
Despite declining prices, U.S. wheat remained more expensive than many other competitive suppliers, particularly Russia. In July 2011, Russian traders offered standard export grade #4 wheat at between $40 and $50 per metric ton below both French and U.S. soft wheat FOB values.
According to U.S. Wheat Associates (USW) Vice-President of Overseas Operations Vince Peterson, “Russian wheat prices were severely discounted as means of ‘buying back’ customer interest following their costly sales defaults of August 2010. That made their wheat temptingly cheap even for the buyers most hurt by the embargo.”
Aggressive pricing effective
This aggressive pricing has been effective and Russia is on track to export a record level of wheat in 2011/12.
A large harvest in the Southern Hemisphere bumped world supplies even higher in November and December. At that time, Argentine FOB wheat were $40 per metric ton less than U.S. soft red winter (SRW) Gulf values.
World market factors began to change last month, however. Excessively cold weather, continued dryness and lack of snow cover increased concern about crop damage or yield losses in key producing areas including North America, Europe and the Black Sea region.
In addition, Russia has essentially depleted its primary export supplies, forcing exporters to originate wheat from much farther inland, increasing transportation costs.
Questions regarding the capability of inland elevators to meet demand have increased concerns and pushed prices even higher.
As of Jan. 27, U.S. SRW is $10 per metric ton below Russian FOB prices and U.S. soft white (SW) is $15 per metric ton lower than Argentine wheat FOB. On a delivered basis to a destination like Egypt, U.S. supplies are now within the same trading ranges as any competing wheat.
The industry is also paying close attention to announcements from the Russian government about limiting exports this year. In October 2011, Russian Prime Minister Vladimir Putin said that the government would impose export restrictions if grain exports reached 23-25 million metric tons (MMT) in order to protect domestic supplies.
Trade estimates indicate exports could reach that threshold by the end of March 2012. According to Russia’s Deputy Prime Minister, the government met today to discuss the issue.
“Just the fear of this happening may well send buyers to seek shelter from other origins,” Peterson said.
“No doubt all of them well remember the 2010 cheap Russian wheat purchases they thought they had booked that vanished along with hundreds of millions of dollars in contract losses with one governmental decision.”
It remains to be seen whether or not these market factors stay strong enough to push the pace of U.S. wheat export sales past the current 2011/12 U.S. Department of Agriculture (USDA) forecast of 25.9 MMT.
But, U.S. wheat is an especially good value today and is always available for the buyers who have the final say.