Because wheat is widely sourced around the world, changes in a single country’s supply mainly affect just local prices. Instead, what tends to drive globally important wheat futures contracts, and thus cash prices, are significant shifts in available supply from the major exporters collectively.
Wheat futures contracts traded on the Chicago Board of Trade (CBOT) have the highest volume in the world and therefore are a proxy for global wheat prices. Although the specifications of the contract are for delivery of #2 soft red winter wheat (SRW) to eligible locations in the United States, the delivery mechanism isn’t the primary use of the contract. Instead, the contract is generally used to hedge cash trading and speculate on the direction of prices by market participants around the globe. Therefore, market participants focus on production in each of the major exporting countries and especially on the available supply of multiple types of wheat from the major origins collectively.
Crop Calendars from the University of Wisconsin-Madison’s SAGE center show the planting, growing, and harvesting periods for a number of crops and locations around the world (left chart). At right, exports from major wheat origin countries fluctuate with the seasons. The wheat supply of each of these countries can influence export demand from the US and therefore futures price.
Of the major origins, no single country has more than 20% market share of world exports. As a result, changes in supply prospects from a single origin will affect local prices, which is reflected in free on board (FOB) export price data provided by the International Grains Council (IGC). This data, which can be found in Gro, allows users to compare FOB export prices from a wide range of origins, such as Rouen, France, versus the Gulf of Mexico. Since a poor crop in one origin country might be offset by good crops elsewhere, markets tend to react to significant shifts in available supply for the major exporters collectively.
Seasonality is another key component to understanding what drives wheat prices. In a typical trend, FOB prices from Argentina were higher than those of other producers while its crop was growing in June through October. But once it was harvested, Argentina became the cheapest among various origins, including the US, Black Sea, and Europe.
Given that the combined supply from major origins is the key driver of futures price, understanding which countries are in their growing period is essential. Crop Calendars from the University of Wisconsin-Madison’s Center for Sustainability and the Global Environment, or SAGE, is a very useful tool on the Gro platform. Northern Hemisphere winter wheat crops are the next area of focus, as they come out of their dormancy stage in March. After that, spring wheat crops in the US, Canada, and Russia are primarily planted in May. The large Southern Hemisphere producers, Argentina and Australia, plant while the spring crops in the North are growing. And the cycle is completed with the Southern crops growing while the Northern winter crops are planted.
During periods when none of the large wheat crops are growing, like the last few months, trade flow dynamics can be the primary price driver of wheat futures. CBOT prices have rallied more than 20% since early September. Several importing countries, such as Egypt, Turkey, and Algeria issued tenders to purchase supplies in the last two months. At the same time Russia's export flow has been slower than the previous year. September to November 2019 exports were down 14% compared to the same period in 2018. Russian farmers are reportedly holding back supply, partly due to a 9% rally in the ruble against the US dollar from early September to mid-January. Currency moves have a direct correlation to cash export prices as exports are paid in US dollars and the farmers receive local currencies.
Better than expected demand and reduced supply from Russia, the largest exporter, pushed prices higher over the last few months. The ruble has declined from the recent high in early January so that may encourage some additional exports. But, prospects for the new Northern Hemisphere winter wheat crops will become the focus of the market in about a month.
A related Insight, discussing Gro’s yield forecasting models for major wheat producing countries can be found here.