The March wheat contract fell no further than Friday's low on Monday, January 25 on the Matif. A sharp drop in prices is noticeable worldwide. In the long term, there is still sufficient confidence in a rising price.
As so often in the wheat market this season, the news comes from Russia. On Friday, January 22, it was announced that the export rate will be doubled in the short term. This confirms the rumor. An official confirmation from the ministry is still pending, but is seen as almost certain. The country has announced a variable export tax for the 2021 harvest. The amount depends on the prices in the country.
Conclusions in this article:
Putin's interference
In mid-December, President Putin began to interfere with his country's export policy. The largest wheat exporter is in a split. On the one hand, it would like to maintain its leadership position when it comes to exporting wheat in the world. On the other hand, the price in the country should not rise too much. Last year the price of bread rose by 20%, which is unfavorable for Putin's popularity.
Even though Russian wheat production once again reached the record level of 2017 in 2020 (85 million tons), the price rose to the highest level in 6 years. In more and more countries, wheat of Russian origin is gaining ground, or is being shared with other suppliers from the Black Sea region. In addition to China – the largest buyer of raw materials worldwide – Russia is doing good business in Africa. Countries that previously relied heavily on Europe. Particularly France.
Conquest of Africa
Russia has now conquered Egypt and is now targeting Algeria. At the moment, the French-speaking African country is still a European bastion with France, Lithuania and Germany as the largest suppliers. The country produces 8 million tons of wheat annually. By expanding the delivery specifications this season, more Eastern European countries can supply wheat that meets the requirements. However, one of these shipments was rejected in November. A discussion has arisen in the country about the grain sector and the lack of transparency.
Back to Russia. Arable farmers are still very reluctant to make offers, despite the fact that the export tax could cost the sector a total of $1,8 billion. As a result of this policy, prices have actually increased sharply. Companies sold other crops (such as rapeseed and sunflowers) last year and are holding on to their wheat. This spring, when the new season starts, that will change.
Pressure on physical price level
Last week, physical prices in Russia fell to $296 per tonne FOB. Down $2 from the week before. This equates to €243,46. This means that the price level of $300 has remained out of reach. There are no buyers at this level and above, despite exporters trying to export as much wheat as possible before the €25 export tax comes into effect on February 15.
Expectations for the coming season also play an important role in last week's price drop. One of the influential analyst firms in the country has increased its harvest forecast to 77,7 million tons of wheat. A blanket of snow has fallen in important growing regions of the Black Sea region, replenishing much-needed moisture reserves and at the same time providing protection against the cold. Exceptionally mild weather is expected over the next 2 weeks, which may cause the snow cover to decrease again. If there is another cold outbreak in February or early March, crops may be damaged. Analysts are therefore cautious.
Historical point of view
What do these facts mean for wheat pricing in the coming months? The futures markets are currently looking for a bottom based on the facts mentioned earlier. More wheat has been sown everywhere in Russia, Europe and the US, but except in Europe it has been dry, making arable farmers reluctant to sell. Export demand is good, which means growers are holding on for a while. Good prices and prospects for corn and soy suggest that less spring wheat will be sown in the US this spring. This is important for the hard (durum) wheat market.
How the grains perform this spring will determine whether the wheat price can take a serious step towards €250, or whether a level in the regions just above €200 is reality. Interventions in the Russian wheat market (most recently in 2007 and 2010) have shown that this always has an upward effect on prices. In 2010 it sparked the Arab Spring.