When Todd Hultman, lead analyst for DTN, wanted to know why U.S. wheat prices were so low despite low ending stocks, all roads seemed to lead back to Russia.
“It doesn’t make sense to me for wheat prices to be this cheap,” he said. “But when you look at the market, next to Ukraine, Russia has the lowest wheat prices in the world. They’ve basically sucked the export air out of the market.”
Hultman was speaking to growers as part of an Agricultural Marketing and Management Organization seminar in February. He was followed by Dr. Randy Fortenbery, an economics professor at Washington State University, who gave a Washington-centric market forecast.
Wheat as a political currency
In order to put today’s global wheat market in context and look at Russia’s role, Hultman went back to the late 1940s. After World War II, the U.S. was the country that fed the world, holding 30 to 40% of the world’s wheat export market share. Canada and the EU were the other major wheat exporters. In 2012, Russian President Vladimir Putin started a major drive to increase wheat production in his country by devoting more land to the crop and giving farmers more resources. Since then, Russia has almost doubled production and built a big surplus of wheat. Today, the U.S. market share of world exports has dropped to less than 10%. With all that wheat, though, wouldn’t Russia welcome higher wheat prices?
“It was a national agenda for other than economic reasons,” Hultman said. “He (Putin) saw that wheat has more value than just supply and demand.”
That value, Hultman believes, is in using cheap wheat as political currency in unsettled, strategically located countries. By keeping prices low, Russia is able to gain influence selling cheap wheat and keeping the leaders in power dependent on Russia to help feed their people. He said Russia and Iran are gaining greater influence near the world’s key trade chokepoints, such as the Suez Canal and the Turkish Straits.
“Why would he want wheat prices to come down? It’s giving him political currency in the world. That is advancing Putin’s influence in very sensitive areas that are dangerous to us,” Hultman said. “That’s why wheat prices have fallen lower than I say they should have. I’m concerned this is going to be a huge dampener on keeping wheat prices down around the world.”
Looking ahead, Hultman said his best guess for white wheat prices for the year ahead is between $5 and $7 per bushel, but there would need to be a big weather event to hit that $7 mark, adding, “It’s best if that weather event happened in Russia.”
He warned white wheat growers not to try to correlate ending stocks-to-use ratios to U.S. wheat prices, but said there are three somewhat useful groupings. If the ratio is less than 20%, white wheat value tends to be higher. The value is lower when the ratio moves above 40%. Anything between 20% and 40% is random.
“I don’t spend a lot of time painfully examining all the estimates of what the wheat crop will be because it’s a loose connection to prices,” he said. “There’s so much uncertainly, emotion, and, honestly, wheat price correlates to things happening in the world that don’t show up on supply and demand tables. It’s a tough market to predict.”
Hultman wrapped up his presentation by listing three things he thought could help counter Russia’s influence:
- Political attention is needed to counter Russia’s strategy with U.S. offers of cheap wheat, especially to key strategic areas. “We don’t need to give it (wheat) away for free. Putin isn’t giving it away for free. We just need to match his price or cut it a little bit,” he said.
- Work with Europe to join the U.S. effort. Support Ukraine’s resistance to keep 1.2 billion bushels of wheat production out of Russian hands.
- Urge the Commodity Futures Trading Commission to ban exchange accounts affiliated with Russian nationals. U.S. futures markets are woefully vulnerable to foreign manipulation.
“This is not your typical wheat market,” he said. “The only thing I can see is we have to come up with our own way to counter, but first, we need a political atmosphere that understands wheat has a value in the world that goes way beyond the price you are paying right now. We need a different political understanding.”
Lower stocks may favor growers
Fortenbery brought the market closer to home, cautioning white wheat growers not to expect a price premium like last year’s. Based on the U.S. Department of Agriculture’s (USDA) February numbers, he is forecasting a $6.03 average price per bushel for winter wheat for 2024-25, adding that if Washington white wheat growers have perfect conditions and harvest 98% of the crop, they are probably looking at prices well below 2023-24 prices.
“As you are looking to start pricing the crop that’s in the ground, for, let’s say, a September or October delivery, you want to beat the average. So, if the average is $6, if somebody is offering you 60 cents or 70 cents over that, is it time to maybe take some price risk out of the market and sell something, even though it’s not the $7.50 you might have gotten a year ago?” he asked.
Other points Fortenbery presented were:
- Net farm income decreased in 2023 by 16%, following record income in 2022. USDA has forecast an additional decline of 24% in 2024.
- Wheat farmers, in general, will do better on a year-over-year basis than Midwest corn and soybean producers.
- Based on current futures price expectations, commodity prices may improve a bit over the next several months, but input costs remain at challenging levels despite some reprieve from year-ago levels.
- The markets appear to be discounting any significant trade disruptions resulting from current conflicts.
Factors in wheat growers’ favor include:
- A year-over-year reduction in world ending stocks.
- Lower stocks for most major exporters.
- Ocean freight rates down significantly relative to a year ago.
- The value of the dollar trading within its previous 12-month range.
And risks and opportunities moving forward include:
- A new farm bill with newish ag committee members. The Pacific Northwest is under-represented on the ag committees, and there’s lots of political animosity and budget fights happening.
- U.S. trade policy. What is the U.S.’s trade position on China and Russia?
- Economic environment (inflation, fed policy, and consumer sentiment).
