Wheat price can maintain high level until 2023

Long before the coronavirus is on its way out, commodity markets worldwide are already making a strong recovery. This applies to things such as precious metals and fuels, but also agricultural raw materials. Closing stocks are falling to record lows worldwide – including in the European Union – while demand is increasing. Countries do not want to risk food shortages and China in particular is tipping the trade balance due to an unabated high demand for soy, corn, wheat and barley.

Long-term effect
The much-discussed export tax on wheat, corn and barley in Russia has been in effect for a week now. This level will continue to rise in the coming months, but the variable export tax in particular is causing fear in the market. This season it will no longer bring any major changes, but it will be a game changer for the 2021-22 season. It could cause Russia to lose its dominant position in the wheat market. The EU is first in line to benefit.

The fact that European wheat, especially from France, is benefiting can already be seen in the current price level. Last week the quotation of the March contract received a significant boost and the increase continued on Monday, February 22. The price reached a high of €241,75 per tonne on Monday afternoon and the September contract is also trading at €200 per tonne.

Effect noticeable in 2022
Because Russian arable farmers sowed a lot of winter wheat last autumn, when there were no export levies but there was a good market price, the effect of the levies for the coming season is not expected to be enormous. However, the area of ​​summer grain will be adjusted this spring and companies are more likely to opt for soy or sunflowers, which are also well priced. The real change is expected when the winter wheat area for the 2022 crop year is due to be sown. It is estimated that arable farmers lose 10% to 20% of their income due to the export tax. There is a good chance that they therefore have less confidence in wheat.

In the first 19 days of February, Russia's wheat exports remained record high. Exporters have done everything they can to export as many grains as possible before the February 15 deadline. Record exports in 2020-21 are therefore still likely. After a month of declines, the Russian wheat price rose again in week 7 to $283 FOB (€232,89). This increase was prompted by a higher American wheat quotation.

The levy is a disaster for the Russian agricultural sector. Even more so because he will probably never calculate his goal. That is to lower food prices in the country. Rising inflation and a low ruble rate are the biggest problems. The EU, Ukraine and the US benefit enormously from the tariffs. This does not mean that the country will disappear completely. Russia remains dominant, especially in the Middle East and North Africa, the largest destinations. Transport costs are very low and only France can compete here. These often involve relatively small shipments and are expensive. This is not feasible for the US, Argentina or Australia. Southeast Asia is more likely to fall prey to these suppliers.

Stocks are falling
The Russian situation is not the only factor contributing to the rise in grain prices. China's hunger for raw materials is an even bigger driver behind price increases. At the moment, very low temperatures in the US and southern Russia can cause frost damage. Due to high consumption, final stocks in Europe, among others, are falling to very low levels. In the US, the closing stock is also shrinking sharply, according to the Ministry of Agriculture (USDA).

Stratégie Grains estimates the European wheat harvest for this year at 129,6 million tons compared to 119,2 million tons last year. In 2019, the harvest amounted to 131,1 million tons. Even with a larger wheat harvest, a high price is realistic due to the factors mentioned earlier.