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The Wheat Marketing Year in Review

Final export commitment data for marketing year (MY) 2022/23 that ended May 31 is now available, providing an overview of the year’s export and demand trends.

In this article, we will look back on the MY 2022/23 demand trends and current MY 2023/24 data to provide context for the year to come as the world wheat market conditions continue to recover from the year’s volatility.

Since the start of 2022/23, wheat prices and freight decreased, and currency markets stabilized following the steep price shock of Mr. Putin’s unprovoked invasion of Ukraine. Despite the improved conditions, volatility and its consequences still reverberate through the U.S. and global wheat markets.

MY 2022/23 Year End Commercial Sales

Even with the year’s price risk, when ordinary hard red winter wheat exported from the Gulf of Mexico averaged $10.70/MT FOB, Mexico, the Philippines, Japan, South Korea, and Taiwan remained among the top U.S. wheat importers in 2022/23 and have consistently been among the leading importers over the last five years.

As U.S. wheat competitiveness began to improve early in calendar 2023, China entered the market, ultimately surpassing Taiwan to claim the number five spot as their purchases surged 38% above the year prior. Moreover, China became the world’s largest wheat importer with the June World Agricultural Supply and Demand Estimates (WASDE) putting Chinese wheat imports at a record 14.0 MMT.

Bar chart compares U.S. wheat sales to top 10 customers in marketing year 2022/23 to MY 2021/22 indicating Mexico, Philippines, Japan, South Korea were among the top importers.

Mexico, the Philippines, Japan, and South Korea have been consistently among the top five U.S. wheat importers. In 2022/23, China became the world’s largest wheat importer, surpassing Taiwan to claim the fifth-place spot among U.S. wheat importers. Source: USW Commercial Sales Report/USDA Export Sales Data.

Hard red winter (HRW) wheat sales were 32% behind 2021/22, a function of high prices driven by drought and exacerbated by the war risks. Hard red spring (HRS) sales were up 4% following the drought in 2021/22 that severely diminished the crop and put exports at their lowest level since 2008/09. Soft red winter (SRW) sales were nearly even with the year prior and 9% above the five-year average as SRW remained competitive on the global market. Following drought-stressed production in 2021/22, white wheat exports were up 35% at 4.5 MMT and tracking SRW trends. Durum sales were up 109% due to improved production increased sales to Algeria and the European Union.

Bar chart compares U.S. wheat by-class sales in marketing year 2023/24 to the same date in MY 2021/22.

Some classes saw improved export sales year-over-year despite an overall reduction in demand. HRW wheat sales were 32% behind 2021/22, HRS was up 4%, SRW was nearly even with the year prior, white wheat was up 35% and durum was up 109%. Source: USW Commercial Sales Report/USDA Export Sales Data.

MY 2023/24 to Date

Demand has been relatively light so far in MY 2023/24 as many buyers delay purchasing decisions for more concrete information about the upcoming harvest and price fundamentals. Adding optimism for importers are recent rains in the U.S. Plains that have helped boost winter wheat crop ratings and rapid planting progress in HRS production areas.

Overall, U.S. wheat commercial sales are down 18% from last year’s pace at 3.9 MMT. Even so, customers in Japan, South Korea, and Taiwan are ahead of their 2022/23 pace, and SRW commitments have surpassed last year’s level by 18% given its competitive price advantage.

USW Commercial Sales Report comparing export sales to specific countries in marketing year 2023/24.

Year-to-date marketing year 2023/24 commercial sales total 3.9 MMT, down 18% from the year prior. Meanwhile, purchases in Japan are 2% ahead of last year, South Korea up 5% and Taiwan up 75%. Vietnam, Guatemala, Ecuador, and Peru have also surpassed last year’s pace, highlighting how the market sentiment has shifted from a year ago. Source: USW Commercial Sales Report/USDA Export Sales Data.

New 2023/24 Estimates

Meanwhile, the June WASDE released on June 9 reported significant increases in world production estimates and ending stocks; however, the increases were unsurprising, leaving futures prices little changed.

World wheat production increased 10.4 MMT from the May estimates to 800.2 MMT on improved output in Russia, India, and the EU. World consumption increased by 4.4 MMT to 796.1 MMT, accounting for increased feed use in China, Russia, and India. Ending stocks increased to 270.7 MMT due to large projected stocks in India, Russia, and the EU. The estimates were also subdued on the domestic front, raising production by 100,000 MT, and increasing ending stocks by 200,000 MT with no other changes to the U.S. balance sheet.

Keep Up To Date

Though it is still very early in MY 2023/24, analyzing past trends and the monthly supply and demand updates helps provide context to aid purchasing decisions. Compared to this time last year, many influences have turned to favor wheat importers, though the war in Ukraine and weather patterns throughout the global wheat growing region add underlying risk. With risk still ever present, information is vital for planning and executing purchases. You can stay current on the latest reports via the U.S. Department of Agriculture and the U.S. Wheat Associates weekly Commercial Sales and Price Reports.

By U.S. Wheat Associates (USW) Market Analyst Tyllor Ledford

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War Disruptions and Logistics Incentivize Imported European Wheat

The news that U.S. flour milling companies have imported European wheat has raised concerns and frustrations for U.S. wheat stakeholders. To an organization like U.S. Wheat Associates (USW) that with our state wheat commission members promotes exports on behalf of U.S. wheat farmers, such news is particularly disappointing. After all, U.S. farmers produce enough wheat each year to meet domestic demand and still offer about half the crop to export markets.

The concern is not about imported wheat per se. Flour millers do import varying amounts of Canadian spring wheat every year. And conditions have in the past made it possible for feed-grade wheat to be imported into coastal pork and poultry production markets. It is important to state that there is more than enough high-quality U.S. wheat available to produce all the flour we need in this country, and the 2023 harvest is already underway.

However, imported European wheat to produce domestic flour is a highly unusual situation. USW wanted to share what is behind these imports and perhaps answer the questions from stakeholders.

Dynamic market factors have created a large price spread between similar classes of European and U.S. wheat. In May 2023, according to AgriCensus data, the published FOB export price for Polish wheat was more than $107 per metric ton less than the U.S. hard red winter (HRW) Gulf FOB export price. German wheat export price in May showed a similar discount to Gulf HRW FOB.

In looking at this difference between the bargain purchase price in Europe versus the current U.S. domestic market replacement values, USW President Vince Peterson recently said that “this may be the biggest trade margin that I’ve ever heard of” in all his years in the grain trade.

Supply Shock

This remarkable difference in prices happened mainly because the relative volume of exportable wheat supplies in Eastern Europe has exploded this year. Putin’s invasion of Ukraine drastically curtailed Ukraine’s ability to export by vessel from its Black Sea ports, in turn sending war-distressed Ukrainian wheat and other commodities pouring across their land borders into Eastern European countries. That movement severely depressed local wheat prices, harming EU farmers and causing five EU countries to implement bans on imported Ukrainian grain staying within their countries. Russia’s record 2023 wheat crop and unfettered exports (now projected at 45 million metric tons (MMT), also a record) created more regional price pressure.

Even though the EU-27 is the world’s second largest wheat producer after China and second largest exporter after Russia, EU wheat imports increased by 6 MMT in the 2022/23 marketing year. Combined with the unprecedented disruption of regional grain movement, USDA estimates the EU’s ending wheat stocks will rise from 10.1 MMT in 2020/21 to 16.2 MMT in 2022/23. And USDA expects European wheat production to increase this year over 2022 even though there is dryness in western Europe.

Yet over the same 3 years, U.S. wheat supplies have gone in the opposite direction, especially supplies of HRW wheat. Drought has hurt total U.S. supplies for three years in a row, first reducing hard red spring and soft white crops. Then drought cut HRW production in 2021/22 and intensified in 2022/23, resulting in a high number of abandoned wheat fields and short overall production. U.S. exportable wheat supply concerns, combined with the disruptive news constantly flowing from the Black Sea conflict, are supply shocks that continue to support the surprisingly high gap between U.S. and EU wheat prices.

Ocean v. Rail Rates

Considering imported European wheat, the question must be asked about the difference in cost between bulk ocean freight rates from Europe to the United States and U.S. rail rates to move wheat to its flour mills. Comparing those rates today, U.S. rail tariffs and fuel charges to transport wheat are close to twice the ocean freight cost on a per-metric-ton basis.

Unfortunately, this transportation cost spread indicates that rail rates have been and continue to be a burden on the value of delivered wheat for domestic and export markets.

A 2020 study by USDA found that rail rates increased by 30% for wheat, 32% for corn, and 30% for soybeans from 2000 to 2014, and wheat rail tariff rates have increased by an additional 18% since 2014. Rising and unfair rail rates for wheat erode its competitiveness for domestic as well as overseas buyers.

That is why USW’s Transportation Working Group is focused on addressing uncompetitive wheat rail tariff rates to make sure that when global market conditions readjust – and they will – domestic rail rates for wheat do not diminish U.S. wheat’s value at home and abroad.

Image shows grain rail cars by a country elevator to illustrate USW comments to the Surface Transportation Board.

Rail rates have been and continue to be a burden on the value of delivered wheat for domestic and export markets.

An Unwanted Hit

Without doubt, the import of European wheat and the market factors that encouraged it are most unfortunate. As Kansas Wheat Vice President of Research and Operations Aaron Harries said, this situation is “another hit against our domestic farmers” who are battling drought, increased operating costs and other headwinds to produce high quality wheat that is more than sufficient to supply all U.S. flour mills and export demand.

USW and others in the industry believe the imported European wheat will likely move to coastal U.S. flour mills – in part because of the high rail rates milling companies would have to pay to transport it to interior mills.

The supply challenges in today’s global wheat market are likely to continue at least through the 2023 harvest. USW sincerely believes that absent the illegal and highly disruptive invasion of Ukraine, the price spread incentivizing U.S. imports would be much closer. Sadly, the conflict rages on.

Domestically, higher wheat prices also encourage increased production, seen in the significant increase in U.S. HRW planted area for the 2023 crop. Unfortunately, the devastating drought undercut that positive trend this year, but prices remain an incentive for U.S. farmers.

If there is a grace note to this situation, USW President Peterson points out that the price spread between EU wheat and U.S. HRW wheat has recently narrowed. The potential for recent rainfall in Northern Plains HRW and hard red spring production regions to push 2022/23 production higher than expected would help fill the price gap – and offers hope for a better outcome in 2023/24.

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Optimism Emerges for U.S. Hard Red Spring Wheat

As the 2023/24 marketing year begins, the market awaits the outlook for the new crop harvest. Despite early concerns anticipating wet conditions and late planting similar to the 2022 crop year, hard red spring (HRS) planting progress has surpassed expectations.

USDA NASS chart showing variable level of spring wheat planting as of June 1 for the years 2016 through 2022.

Though planting progress influences total production and yield, it is not predictive. Years with late planting can yield average crops, while rapid planting does not equate to good production potential. Factors such as soil moisture, weather, and disease pressure can significantly influence yield potential during crop development. Source: USDA NASS Data.

Rapid Planting Progress

Spring wheat farmers have made incredible planting progress after a historically snowy and cold winter delayed spring fieldwork in the Northern Plains. According to the USDA Crop Progress Report, as of June 4, 93% of the spring wheat was planted, up from 85% the week prior and even with the five-year average. In key HRS-producing states North Dakota, Montana, and Minnesota, USDA estimates plantings at 88%, 92%, and 98% complete, respectively. Over the last several weeks, rainfall has benefited soil moisture, and more recently, dry weather paired with above-normal temperatures helped accelerate planting progress. Between May 21 and May 28, 45% of the spring wheat crop was planted.

USDA NASS line graph showing spring wheat planting progress by week from 2018 through current 2023 date.

After a long winter with historic snowfall in the Northern Plains, 2023 planting (red dotted line) started late. As temperatures warmed rapidly, progress accelerated from several weeks behind to even with the five-year average. Source: USDA NASS Data.

A Hopeful Forecast

As spring wheat planting winds down, emergence hovers near the five-year average. As of June 4, spring wheat was 76% emerged, above the five-year average of 74%. The forecast predicts scattered showers for North Dakota, Minnesota, and Montana, a potential benefit to the newly planted HRS crop. Topsoil moisture in the top HRS producers remains good, with 72% boasting adequate to surplus moisture in North Dakota and 66% in Minnesota; meanwhile, drought removal is likely in much of Montana’s growing regions.

Map of precipitation in the United States the last week of May 2023 shows that wheat production regions including the Northern Plains have received sufficient rain to support planting progress and growth of the spring wheat crop.

Scattered showers have greatly benefited much of the U.S. wheat-growing regions, alleviating Montana’s drought and improving conditions in other key producing states. Source: USDA Weekly Weather and Crop Bulletin.

Looking Ahead

The current outlook for HRS remains positive, though continued optimism hinges upon the weather’s cooperation. Recent warm temperatures helped jumpstart planting and emergence, but additional moisture will be necessary to sustain the current confidence levels.

In addition to weather, the underlying impacts of the tight HRS balance sheet and lingering price volatility due to the war in Ukraine will continue to influence the market. As the 2023/24 marketing year continues additional information regarding the production outlook will become available.

To be released on July 12, the July Crop Production Report and the World Agricultural Supply and Demand Estimates will include USDA’s first by-class wheat production estimates. Until then, you can stay updated with the latest crop conditions and harvest progress via the U.S. Wheat Associates weekly Harvest Report.

By USW Market Analyst Tyllor Ledford

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USDA Reports Provides First Look Into 2023/24 Crop Year

On May 12, USDA released its initial estimates for the 2023/24 marketing year (MY) year, providing the first glimpse into how the world wheat situation has shifted in response to political instability, inflation, climate variability, and the volatility seen in the last year. This article will examine key takeaways from the World Agricultural Supply and Demand Estimates (WASDE) and the USDA Crop Production Report, and what it may mean for the 2023/24 crop year.

Global Outlook: A Focus on Weather

Despite recording record wheat production of 789.7 MMT, up 1.5 MMT from 2022/23, world wheat supplies have tightened. Consumption surpasses production by 2.0 MMT for the fourth consecutive year, leading to a decline in global ending stocks. Projections indicate the lowest global ending stocks in eight years at 264.3 MMT. Ending stocks in the five non-Black Sea exporting countries (U.S., Canada, Australia, Argentina, and the EU) have hit their lowest level since 2007/08 at 38.2 MMT.

Production in major exporting countries is also forecast to be down 10.0 MMT to 367.6 MMT from a record 377.5 MMT in 2022/23. Production is predicted to increase in Argentina (+7.0 MMT), Canada (+3.2 MMT), and the EU (+4.7 MMT). However, these increases do not offset flat production in the U.S. (+0.3MMT) and reductions for Ukraine (-4.4 MMT), Russia (-10.5 MMT), and Australia (-10.0 MMT).

Weather poses risks to many production regions, including anticipated dryness in Australia associated with an El Niño weather event and reports of dryness in Canada. USDA predicts improved production in Argentina that hinges on recovery from the 2022/23 drought there. With ending stocks already hovering at 15-year lows, any change in production in major exporting countries could have a direct influence on world wheat prices.

A bar chart from the International Grains Commission (IGC) shows change in wheat production in major exporting countries by year over year and change compared to the 5-year average production.

2023/24 Major Exporter Production Change. With significant production reductions anticipated in Ukraine, Russia, and Australia, any change in the outlook for other major exporters will impact the already tight ending stocks held by exporters. Source: IGC.

U.S. Situation- Bullish Supply Meets Bearish Demand

Much like production in other major exporting countries, the weather has driven the U.S. wheat harvest conversation. As the drought in the U.S. Southern Plains persists, the May 12 USDA crop production figures put Kansas HRW production at 14.0 MMT, the lowest output since 1957/58. Similarly, USDA projections put Kansas (the largest HRW-producing state) wheat production at 181.0 million bushels. The annual Wheat Quality Council (WQC) winter wheat tour confirmed this outlook.

Despite the bullish outlook from the May Crop Production report and the subsequent futures rally, HRW futures prices declined, losing 73 cents in the week ending May 22. Likewise, hard red spring (HRS) and soft red winter (SRW) also softened, down 64 and 55 cents respectively from last week. A key factor contributing to this bearish trend is demand rationing in the face of high prices and seasonal pressures.

Bar chart showing U.S. wheat export sales by class, year-to-date as of May 11, 2023. HRW sales are significantly lower than 2021 at this date.

U.S. HRW commitments as of May 11, 2023, are 32% behind last year’s pace at 5.1 MMT. Meanwhile, HRS sales are up 4% at 5.7 MMT, white wheat is up 39% at 4.7 MMT, SRW is up 1% at 2.9 MMT, and durum has increased 131% to 452,000 MT. Source: USW Commercial Sales Report.

Bright Spots

Despite the complexity of the HRW situation, the outlook for other U.S. wheat classes, especially soft wheat classes, remains optimistic. The Crop Production Report put SRW estimates at 11.0 MMT, a 21% increase from 2022/23, and prices for SW and SRW continue to trend lower to remain competitive with other origins. Likewise, as of the May 21 Crop Progress Report, the winter wheat conditions have begun to see improvement, with a season-high of 31% ranking good to excellent. Spring wheat farmers have also made tremendous planting progress, with a 24% increase in plantings over the week, reaching 64% planted, only 9% behind the five-year average, alleviating concerns about late planting.

A More Detailed Look to Come

In the coming weeks I will recap the 2022/23 U.S. wheat export trends and highlight what to watch as new crop sales increase. In June, USDA will begin revising its initial estimates for the 2023/24 world supply and demand and the July WASDE will provide the first by-class wheat projections for the 2023/24 crop year.

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2023 Wheat Tour Sees Short Crop; Black Sea Grain Deal Prevents Rally

As expected, the results of the 2023 Hard Winter Wheat Tour the week of May 15 confirmed the extremely short wheat crop in Kansas and surrounding states. Typically, the market reaction would be bullish. But 2023 is not a typical year, and the volatile uncertainty of the Black Sea conflict once again overshadowed basic supply and demand factors.

After following six routes throughout central and western Kansas, far southern Nebraska and far northern Oklahoma, for three days, the average calculated yield average for fields that will be harvested was 30 bushels per acre (bu/a). Kansas Wheat reported that the official tour projection for total wheat production in Kansas is 178 million bushels (4.85 million metric tons) compared to the 5-year average of 303 million bushels.

In spite of that bullish news, the latest extension of the Black Sea Grain Initiative pushed markets down. From May 15 through the end of the tour May 18, the HRW July futures contract lost $0.41. July hard red spring futures lost $0.45 and July soft red winter was down $0.49.

Reuters Photo showing farmer Gary Millershaski examining a stand of drought-stressed wheat during the 2023 Wheat Quality Council 2023 Hard Winter Wheat Tour.

Gary Millershaski, a farmer and scout on the Wheat Quality Council’s Kansas wheat tour, inspects winter wheat stunted by drought near Syracuse, Kan. Photo Copyright Reuters.

People Wanted to See This Crop

The annual Wheat Quality Council (WQC) winter wheat tour always attracts the market’s attention, this year even more so. More than 100 hard red winter wheat crop stakeholders participated, up from about 80 “scouts” in 2022, perhaps to see for themselves just how bad the crop is in the country’s leading hard red winter (HRW) wheat producing state.

“There’s just a general increase in interest this year,” WQC Executive Director Dave Green said to Progressive Farmer/DTN before the tour. “A lot of the big [milling and wheat food] companies want to have people on the ground and not just hear about it from someone else. People want to see this crop.”

Based on May 1 data, USDA estimated total 2023 U.S. HRW production at its lowest level since 1957/58. That includes USDA’s estimated average of 29 bu/a in Kansas. In fact, the wheat tour estimated average yield at 29.8 bu/a on Day 1 and 27.5 bu/a on Day 2 in the hard-hit western region.

Abandonment X-Factor

Wheat tour scouts were instructed to only calculate yield estimates for fields that have the potential to be harvested for grain, and not to calculate yields for abandoned fields. Kansas Wheat CEO Justin Gilpin noted that the 178 million bushel Kansas production estimate is a compilation from field evaluations throughout all 3 days on the tour, individual estimates of abandonment, and potential from this point until harvest. Estimates from scout estimates are pooled and averaged and that is the final production number that the WQC Tour issues at the end of the tour.

USDA NASS on May one estimated Kansas wheat production at 181 million bushels in its May Wheat Outlook. Assessing abandonment, it pegged the harvested-to-planted ratios for Kansas at 81% compared to a long-term average of 93%. Including Oklahoma at 47% (with an average yield potential of 23 bu/a), Texas at 30%, and Colorado at 73%, all are historically low.

Kansas Wheat pointed out that the wheat tour captures a moment in time for fields across the state that are still 3 to 6 weeks from harvest. The WQC coordinates this effort by breeders, producers, and processors to improve wheat and flour quality. The primary goals of the tour are to make connections within the wheat industry, allow participants to meet wheat farmers and see the growing crop, and to highlight the agriculture industry.

Photo at the top of this page from Twitter shows a field near Haven, Kan., with an estimated yield potential of 10 b/ac. Photo Copyright, Corbin Catt/Catt & Crew Farms. See more photos and other information by searching #wheattour23.

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Competitive U.S. Soft Wheat Creates Buying Opportunity

Just one year ago, U.S. wheat prices hovered near record highs. The geopolitical ramifications of Russia’s invasion of Ukraine stoked supply concerns and fears of spiraling food price inflation, and India had just banned wheat exports, further fueling wheat supply fears.

Flash forward to the week of May 2, 2023, Chicago Board of Trade soft red winter wheat (SRW) futures traded at their lowest level since March of 2021 at $5.95/bushel, earning that class the elusive honor of being the cheapest wheat on the world market.

After months of high prices, SRW and soft white (SW) classes have finally become more price competitive, providing a buying opportunity for importers. In this article, we will look in-depth at the market conditions for U.S. soft wheat classes and the factors influencing the entire market.

U.S. soft white wheat futures prices.

U.S. wheat prices retreated significantly the week of May 5 to touch near two year lows before ending slightly higher, demonstrating how quickly price sentiment can shift, though soft red winter wheat prices have trended lower. Source: U.S. Wheat Associates Price Charting Tool.

Competitive U.S. Soft Wheat Classes

Looking back, the U.S. soft wheat classes were poised to be more competitive thanks to several positive supply-side factors. Last year, both SW and SRW registered above-average production. The SW harvest came in at 4% above the five-year average and 35% above the drought-afflicted 2021/22 crop, while SRW was 16% above the five-year average, even boasting two large crops at 9.8 MMT in 2021/22 and 9.1 MMT in 2022/23.

Moreover, heading into marketing year 2023/24, the production outlook for SRW and SW remains positive. According to the USDA Prospective Plantings Report, SRW planted area increased 18% to 7.8 million acres (3.1 hectares), while white wheat plantings are estimated up 2% at 4.33 million acres (1.75 million hectares). The combination of good production last year and a positive outlook for the 2023 crop helped position SW and SRW to capture demand and remain competitive on the world market.

With the production bump and increased global competition, U.S. soft wheat prices have steadily decreased in the last few weeks. For a brief moment on May 2, U.S. SRW was the cheapest wheat in the world, coming in on average $10.00/MT FOB less than French wheat, $14.00/MT less than Russian wheat, and $13.00/MT less than Ukrainian. As a result, the U.S. Wheat commercial sales recorded 145,000 MT of SRW last week, the entire quantity likely bound for China. Meanwhile, SW wheat FOB prices hovered at $275.00/MT compared to $288.00/MT for Australian Standard White.

U.S. soft white wheat FOB export prices.

U.S. soft wheat prices have trended lower in search of demand. Soft white wheat prices have decreased by 39% since April 2022, while SRW has dropped by 45%. Even since the start of 2023, prices have come down 12% and 18%, respectively. Source: U.S. Wheat Associates Price Report

Underlying Bearish Market Factors

In addition to the positive supply outlook for soft wheat classes, recent bearish market factors have also been at play, influencing all U.S. wheat class prices. Last week hard red spring (HRS hit a nearly two-year low of $7.58/bu while hard red winter wheat (HRW) breached the $8.00/bu barrier to close at $7.71/bu. Seasonal influences also contribute to a fall in prices, especially for the soft wheat classes with a looser balance sheet and optimistic production outlook. Farmers and exporters will need to clear out their bins as new crop approaches to make room for the upcoming harvest.

Additionally, In the last two weeks, rain has fallen on some of the most drought-afflicted areas of the U.S. Southern Plains. Before these showers, it had been over 270 days since 0.25 inches of moisture (6.35 mm) had been recorded in some areas. The rains helped relieve some price pressure as the market assessed the moisture’s impact on drought conditions in the HRW growing region.

Beware The Bull

Demonstrated by this week’s jump in futures prices from the previous week’s lows, bullish influences are always lurking, especially as the Black Sea conflict continues to be an unpredictable bullish influence. As the Black Sea Grain Initiative approaches its May 18 expiration date, the longevity of the corridor hinges on Russia’s continued cooperation.

Furthermore, though the major HRW growing region in the Southern Plains received needed rains, there is concern about its impact. Some say the showers were “too little too late” for the crop as many fields already face abandonment.

Map of NOAA's prediction of long-term drought showing how U.S. soft white wheat is outside of the drought area.

Despite the rains in the U.S. Southern Plains, drought persists throughout the central HRW growing region. The recent showers helped improve soil moisture but not enough to reverse the drought impacts. Source: U.S. Department of Agriculture Drought Monitor.

Key Takeaways

This week’s price movements are just the latest example of how quickly market sentiment can shift, especially with influences as unpredictable as the weather and the war in Ukraine. Amidst the persistent market volatility, buyers must be wary of the market trends and be positioned to take advantage of every buying opportunity. As always, U.S. Wheat Associates (USW) representatives are committed to helping customers capitalize on market opportunities and navigate the ever-changing wheat market.

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CPKS Railroad Merger and U.S. Wheat Exports

On April 18, 2023, Kansas City Southern Railway Company (KCS) and Canadian Pacific Railway Limited (CP) officially merged to create a new Class 1 railroad CPKS, the first single-line service across Canada, the U.S., and Mexico (map above from Trains.com).

CPKC railroad logoRail logistics comprise a sizeable portion of U.S. wheat export basis, encompassing the costs of transporting wheat from the vast growing region in the central U.S. to export hubs in the Great Lakes, Gulf of Mexico, and the Pacific Northwest. The acquisition brings the total number of Class 1 railroads in North America from seven to six and may potentially impact wheat exports as the industry restructures in response to the merger.

In this article, we will summarize the importance of domestic rail for U.S. wheat buyers and look at the current trends in bulk rail as we look ahead to the merger’s implications.

Historical Perspective

Since the 1980s, the railroad industry has seen significant consolidation, going from 33 North American Class 1 railroads in 1980 to six in 2023.

In 2022 the four largest rail companies, Burlington Northern Santa Fe (BNSF), Union Pacific (UP), Canadian Pacific (CP), and Canadian National (CN), held 82% of the market share for grain origination in North America, creating an oligopoly in the U.S. rail transportation sector. The increased consolidation decreased the number of firms in the market competing for business, shifting the market power to favor rail service providers.

Pie chart showing the % market share for the 7 Class 1 railroad companies in North America before the merger of CP and KCS.

The top four Class 1 railroads in North America control 82% of the grain market share. The merger of CP and Kansas City Southern brings the total number of Class I railroads from seven to six. Source: U.S. Department of Agriculture, Agricultural Marketing Service. Grain Transportation Report. April 20, 2023. Web: http://dx.doi.org/10.9752/TS056.04-20-2023

A potential consequence of increased concentration in the industry, tariff rates for all grains have steadily increased over the last 20 years; thus, making transportation costs greater for exporters who, in turn, increase basis for customers. A 2020 study by USDA found that from 2000 to 2014, rail rates increased by 30% for wheat, 31% for corn, and 30% for soybeans. Since 2014 wheat rail tariff rates have increased by an additional 18%. As rates rise, it erodes the competitiveness of U.S. wheat classes in the export market and makes U.S.-origin wheat more expensive for importers.

Line graph showing an increase in railroad tariff rates for corn, soybeans, and wheat from 2010 through 2023 to date.

Rail tariff rates have been on the rise for all bulk grains since 2010. Rates continued to increase even as shippers experience what they considered poor performance through most of 2022. Source: USDA AMS Rail Dashboard

Ongoing Issues

Throughout 2022 rail logistics faced considerable challenges that impacted the quality of performance throughout the bulk rail sector, including service interruptions and crew shortages. In October 2022, Secondary Railcar Auction Market Bids hit their highest level since 2014, reflecting massive demand for rail freight and an insufficient supply to meet the demand.

Graph showing historical secondary auction market railroad rates for grain from 2013 through 2023 to date.

Secondary auction market rates move more quickly than tariff rates and better reflect current supply and demand shifts as shippers buy and sell claims for guaranteed service. If demand is high during a particular period, bids increase, meanwhile when supplies are adequate secondary rates will hover near zero or negative if demand hits a low threshold. In the fall of 2022, Secondary Railcar Auction Market Bids hit their highest level since 2014. Source: USDA AMS Rail Dashboard

Performance issues and subsequent demand for rail cars contributed to elevated export basis throughout the fall of 2022. Strong basis levels and elevated wheat futures, a response to the geopolitical tensions brought on by the Russian invasion, created enormous price risk for U.S. wheat importers and further diminished U.S. wheat’s competitiveness in the world market.

Line graph showing changes in the "basis" for hard red spring wheat to Gulf, PNW and Lakes ports from April 2022 to April 2023 to demonstrate a spike attributed to railroad rates for shipping wheat.

Though wheat basis levels often increase during the fourth quarter of the calendar year as exporters focus on corn and soybean export programs, in the fall of 2022 basis levels skyrocketed. Basis levels jumped to $0.50/bu ($18.40/MT) over the previous five-year average, combined with historically high futures prices. Source: U.S. Wheat Associates Price Report

A Look Ahead

The Surface Transportation Board approved the merger on the grounds of efficiency, positive environmental impacts, improved rail performance, and increased employment; still, the STB necessitated additional oversight to ensure the preservation of competition. Despite the approval, the U.S. wheat industry remains skeptical of the merger’s effects on wheat export competitiveness, taking into account performance issues from major railroads, basis and logistics costs, and the oligopoly of the U.S. railroads.

On the other hand, CPKCS could help increase competition in some regions, due to increased access routes previously unserved by individual companies. Nevertheless, U.S. Wheat Associates will continue to support oversight from the STB and policies such as reciprocal switching that help preserve competition and contribute to our dependable, reliable supply chain.

By USW Market Analyst Tyllor Ledford

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Wheat Industry News

News and Information from Around the Wheat Industry

 

Speaking of Wheat

“Until some of these geopolitical conflicts are resolved — it’s difficult to envision a return to the level of free trade we enjoyed through the late 20th and early 21st centuries. Difficult as it may be, governments must resist the urge to limit or ban grain exports unless the food security situation in their countries is truly dire. The fate of a growing number of food insecure people on this planet — estimated at nearly 350 million people (more than the population of the United States) in 2023 by the World Food Programme — depends on it.” – Arvin Donley, Editor, World Grain. Read more here.

SW Kansas: “One of the Worst Wheat Crops in 50 Years”

That is how wheat farmer and agricultural journalist Vance Ehmke described the situation in the southwestern corner of Kansas. Ehmke said there will be “no dryland [winter] wheat at all” this year there and extending about 160 kilometers into the Texas and Oklahoma Panhandles and southeastern Colorado. “I looked at 30 to 35 years of Kansas wheat crops and abandonment runs about 10%. I could see 25% abandoned here this year with very low yields on the rest,” he wrote in The Hutchinson News. See also Bloomberg News’ video summary here.

Winter Wheat Conditions Still Lower

Farm broadcaster Ron Hays’ Oklahoma Farm Report notes the April 10 USDA NASS Crop Progress Report shows U.S. winter wheat conditions are tied with 1996 for the lowest rating in 40 years. Nationwide, winter wheat is 27% good to excellent. That is down one point from the previous week and compares to 32% good to excellent at the same time in 2022. Read more here.

The Passing of Joe Kejr

U.S. Wheat Associates (USW) joins so many others in our industry in expressing our condolences to the family of Ottawa County, Kan., farmer Joe Kejr, who passed away suddenly April 8, 2023. “Joe loved being a wheat farmer — thoughtfully growing, observing and discussing the crop throughout each unique season,” said Justin Knopf, immediate past president of the Kansas Association of Wheat Growers and close family friend. “We will miss his focus and efforts on building relationships, trust and unity throughout the industry. His example, steady presence, leadership and friendship will be sorely missed by so many of us here in his community and across the country.” Learn more about the Kejr’s farm operation here.

China to Lead 2022/23 Wheat Import Volume

USDA reports that Chinese wheat imports are forecast up to 12.0 million tons in 2022/23—the country’s highest level of imports since 1995/96 when imports reached 12.5 million. Domestic grain prices have remained high given the country’s minimum support price policy and reduced auction activity amidst uncertainty surrounding the government’s COVID-19 policies. Competitive pricing has prompted China to import large volumes of both milling and feed quality wheat. Australian wheat is especially competitive following 3 consecutive years of record crops. China continues to aggressively purchase Australian wheat supplies, with July-February imports up 66% compared to the previous year. Read more.

2023 Hard Winter Wheat Quality Tour Registration Ends May 1

The tour, sponsored by the Wheat Quality Council, will be May 15 to 18. Register for the Wheat Tour at wheatqualitycouncil.org. The tour brings in participants from around the world who interact with Kansas farmers, network with their peers, learn more about wheat production while they assess the condition and yield potential of the hard winter wheat crop across the state of Kansas. USW will report on tour results in Wheat Letter.

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USDA Reports Confirm the Tight U.S. Wheat Balance Sheet

On March 31, the United States Department of Agriculture (USDA) released its yearly Prospective Plantings Report, and Quarterly Grains Stocks reports. The reports provide valuable insights for U.S. wheat importing customers as we enter the final two months of the 2022/23 marketing year and look ahead to the 2023 harvest. In this article, we will analyze USDA’s recent reports and their implications while also looking at the broader market conditions not encapsulated in USDA’s data.

Prospective Plantings Reaction

USDA estimates the total wheat area for the marketing year 2023/24 at 20.1 million hectares (mha) (49.9 million acres), up 9% from 2022 and 8% above the five-year average.

With a 9% increase in the total area year over year and the highest planted area since 2016, the numbers appear bearish at first glance. However, on Friday, March 31, Kansas City Board of Trade HRW futures closed up 6 cents, Minneapolis Grains Exchange HRS futures closed up 16 cents, and Chicago Merchants Exchange SRW futures remained unchanged. The market reaction points to more bullish influences outside the USDA report scope.

Map of U.S. states showing acre volume and % change in planted area compared to 2022.

Winter wheat planted area is up 13% at 15.2 mha (37.5 million acres). HRW seeding is up 13% at 10.5 mha (26.0 million acres), SRW area increased 18% to 3.1 mha (7.8 million acres), and white winter wheat is at 1.5 mha (3.7 million acres). Source: Prospective Plantings Agricultural Statistics Board Briefing, March 31, 2023.

Despite the increase in overall wheat area, spring wheat area dropped 2% to its lowest level since 2017, 4.3 million hectares (10.6 million acres). Likewise, even as the winter wheat seeding outlook appears positive, the assumption that increased planted area equates to increased production does not always hold, especially as drought persists in the U.S. Southern Plains.

Map of U.S. states shows planted area and % change compared to 2022 for spring wheat.

USDA report showing total spring wheat acres are projected to be down 2% from 2022 at 4.3 million hectares (10.6 million acres). USDA forecasts HRS seedings at 4.0 mha (9.9 million acres), down 3% from 2022/23. Durum plantings are up 9% at 728,000 hectares (1.8 million acres). Source: Prospective Plantings Agricultural Statistics Board Briefing, March 31, 2023.

Weather Risk Creates Uncertainty

Since the spring of 2022, conditions in the U.S. Southern Plains have steadily deteriorated. A continued lack of precipitation and above-normal temperatures has left 48% of the winter wheat-growing region in drought. The severe dryness increases the likelihood of abandonment (particularly in Hard Red Winter wheat) and has a detrimental impact on the yield of the fields that make it to harvest.

Vertical bar chart from USDA Reports showing a comparison of wheat planted and harvested area since 2017.

Winter wheat abandonment has averaged 33% the last five years, , though in 2022/23, it increased to 42%. As drought persists, the share of area abandoned may increase. Source: USDA National Agricultural Statistics Service.

Meanwhile, late-season snow and cold temperatures in the HRS planting region have delayed spring fieldwork. A late spring may affect spring wheat plans, increasing the likelihood of prevent plant as farmers run up against crop insurance deadlines. A rapid warm-up is not yet out of the question.

Map of the U.S. from USDA reports showing snow depth and winter wheat production areas.

Winter weather persists in much of the Northern Plains. As of April 1, farmers in the Dakotas, Montana, and Minnesota have had less than 1 day suitable for fieldwork. Late planting has a negative impact on yield and area. Source: USDA Weekly Weather and Crop Bulletin.

A Tight U.S. Balance Sheet

As drought persists in the U.S. Southern Plains and cold lingers in the North, the weather fuels supply concerns; thus, supporting wheat prices. In addition to weather fears, the USDA Quarterly Grains Stocks report put all wheat stocks at 25.7 MMT, down 8% from last year and hovering at their lowest level since 2008. Meanwhile, the April World Agricultural Supply and Demand Estimates forecast 2022/23 U.S. ending stocks at 16.3 MMT, up 5% from the March estimates, but still down 14% from 2021/22.

Though ending stocks rest precariously above historic lows, April’s increase may help alleviate some price pressure, especially as weather remains an unpredictable bullish factor. Nevertheless, as the end of the marketing year approaches, a tighter balance sheet and weather uncertainty will continue to influence U.S. prices until well into the 2023 harvest.

By USW Market Analyst Tyllor Ledford

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Wheat Industry News

News and Information from Around the Wheat Industry

 

Speaking of Wheat

“In my view, [news that Cargill and Viterra will stop loading Russian grain] puts more questions around Russia’s ability to export. Russian state exporters claim that they’ll be able to keep grain moving out at the same pace, but major speculative funds holding large short positions may lack confidence in that currently, supporting the recent price recovery as they exit short positions. [March 29] Chicago wheat showed modest gains. All eyes will be focused on [upcoming USDA reports].” Sean Lusk, analyst with Barchart.com.

UK Establishes Scientific Plant Breeding Regulation

On March 23, a United Kingdom (UK) Genetic Technology (Precision Breeding) Bill received Royal Assent and became an Act of Parliament and law. The regulation covers precision-bred plants and animals developed through techniques such as gene editing, which is different from genetic modification, and create a new science-based and streamlined regulatory system to facilitate greater research and innovation in precision breeding while maintaining stricter regulations for genetically modified organisms (GMOs). Read the entire story here.

Cooperators Call for Increased Export Promotion Funding

In a period when inflation has raised the cost of everything in the U.S. wheat export supply chain, agricultural producers and processors have asked Congress to double the funding for the Market Access Program (MAP) and the Foreign Market Development (FMD) Program. Both have not had funding increases since 2006 and 2002 respectively. According to USDA Undersecretary for Trade and Foreign Agricultural Affairs Alexis Taylor, requests for MAP and FMD monies have far exceeded current funding. U.S. Wheat Associates (USW) is one of the organizations that cooperates with USDA’s Foreign Agricultural Service programs to conduct trade service and technical support for export customers. Read the entire story here and visit www.AgExportsCount.com.

National Ag Day Celebration

On March 21 the United States celebrated 50 years of National Ag Day. Started in 1973, National Ag Day increases public awareness about agriculture’s vital role in society. This year, events included grassroots activities across America, and strong social media coverage. Events in Washington, D.C. highlighted U.S. ag’s global impact. The day began with Secretary of Agriculture Tom Vilsack addressing a lively crowd at the USDA, saying “every day should be Ag Day.” Later in the day, a Taste of Ag reception was held at the Library of Congress. Here’s a short video tribute to U.S. farmers, ranchers, and dairy operators:

 

Cargill to Suspend Grain Export Elevations in Russia

Food and agricultural company Cargill announced March 28 it “will stop elevating Russian grain for export in July 2023 after the completion of the 2022-2023 season.” In addition, Viterra announced March 29 it will also stop loading Russian grain. Cargill owns a stake in the grain terminal in the Black Sea port of Novorossiisk but did not specify if it was selling the stake. Reuters reported that Cargill’s shipping unit will continue to carry grain from the country’s ports. Reuters added that the move stoked concerns about global grain supplies disrupted by the Russian invasion of Ukraine, lifting benchmark wheat futures prices this week from earlier losses.

India Cuts Wheat Harvest Estimate

The Indian government could reduce its wheat harvest estimate as unseasonal showers and hailstorms led to sizable damage to the wheat crop in the Indian states of Punjab, Uttar Pradesh and Madhya Pradesh, sources in the agriculture ministry told S&P Global Commodity Insights. According to government sources, the production estimates for marketing year 2022-23 (April-March) are likely to reduce by up to 2 million metric tons (MMT) from the projected output of 112.2 million mt, a record harvest. S&P Global noted however that surveyed market participants expect Indian’s wheat harvest to be lower.

 

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