The price of wheat reached its highest point in 6 years on the Matif in Paris in the first full week of January. This loss was made up on Monday 11 January with a plus of € 2,50. Despite the relatively high price level, it is questionable whether this reflects the real situation well. Shouldn't the price go up further?
It is the bulls' turn on the grain market, which is once again posting green figures in both Paris (Matif) and Chicago (CBoT) on Monday, January 11. The peak for the March wheat contract in Europe is €219,50. The American stock market is trading lower for wheat, but higher for corn and soy. The CBoT in particular is awaiting new information in the Wasde report, which the US Agriculture Department (USDA) will publish on Tuesday, January 12. This should provide more clarity about, among other things, the wheat area in the US, exports and (final) stocks.
Russian oil on the fire
The announcement of a Russian export tax on wheat added fuel to the fire. After much speculation, things remained relatively calm, but more and more stock traders and analysts now think that the impact of this decision could have major consequences on the further development of prices, resulting in new increases. There are several reasons for this. We list 4 of them:
1. Exports are disappointing
Russian wheat exports are more disappointing than previously thought. The well-known market analysis agency SovEcon expects that 36,3 million tons of wheat will be exported this season, compared to, for example, 40 million tons estimated by the USDA. The direct reason for this is the export tax of €25 per tonne. In the 2014-2015 export season, the Russian government made a similar decision, after which exports completely collapsed. SovEcon therefore believes that a similar situation is lurking this year as well. In that season, exports fell from 2 million tons per month to only 500.000 tons, while they normally increase in the spring.
2. Crops are in bad shape
In Western and Central Europe, winter grains are sown on time on average. It was only very wet in the coastal areas, which meant that sowing was done late and under poor conditions. The lack of low temperatures ensures that the crops can develop well. Yet the area in Europe, and mainly France and Germany, is not particularly large. In Russia, almost a quarter of wheat fields are in poor condition due to persistent drought. There has been little snow, which means that moisture reserves are not replenished and crops can easily be damaged by frost.
3. Russian farmers don't want to sell
Running a large agricultural company in Russia – perhaps with 50.000 hectares – is a bit different than here. The companies sell part of their grain stock in the winter to purchase seed, crop protection products and fertilizers for the new season. Companies are doing well financially this season. Due to the corona crisis, all agricultural products have been well priced throughout 2020. They took advantage of this by selling a lot. There is therefore hardly any supply at the moment, which means that exporters have to open their wallets. This year, the physical price (FOB) has already increased by $13-18 per tonne, compared to the end of 2020.
4. There are no alternatives
It is not new that Russian arable farmers do not want to sell. Ukraine was able to benefit from this by exporting a lot at the end of last year. In contrast to Russia, the grain harvest there was very disappointing due to drought, which caused the country to sell out. Nearly three-quarters of the export quota of 17,5 million tons had already been filled by mid-December. At the same time, the demand is certainly there. For example in the Middle East. Tenders are regularly issued for new shipments. European suppliers, from France or Romania for example, will have to fill those tenders in the coming months. Egypt, the largest buyer of wheat, claims to have sufficient supplies. All the more reason for analysts to believe that the country will soon buy more wheat, thus trying to calm the market.
Conclusions
If you add all these factors together, a Matif quotation between €217-219 does not fit the current situation regarding supply and demand. An important factor for the European market is also the exchange rate of the euro. Russia has been able to benefit from their ruble exchange rate, giving crop farmers a lot of rubles for their wheat. The euro is currently at a breaking point and must either break through the resistance line or fall.
European data on wheat exports show that the volume fell slightly in December. Especially to China, which is the largest buyer this season. Other countries also decreased less. FranceAgriMer, the French government agency, has increased its export forecast for the country for the third time in a row due to a demanding market. However, the volume remains below that of last season.
Consequences for feed prices
The price of wheat is following that of grain maize, which already showed a short-lived peak when the contract period changed in Paris. The current market conditions are therefore especially important for buyers on the feed side: pig, dairy and poultry farmers. It is not without reason that the Boerenbusiness Compound feed price indicator, for fattening pig chunks and for A-pellets, both an increasing forecast above 100 index points. For arable farmers who already have their wheat in the ground, the situation will hopefully result in a better pool price at the end of the day. In addition, it may be interesting to hedge now, with a price level on the Matif for the 2021 harvest approaching €200.