Record harvests, the strong dollar and cheap oil combine to shake up the multibillion-dollar global wheat market
The global trade map in wheat is being redrawn by people like Greg Harvey.
For years, Singapore-based Mr. Harvey has used Australian wheat in the grain mills he manages throughout Southeast Asia. Last December, he turned to a different source: Argentina.
The transformation comes as record harvests, the strong dollar and cheap oil are combining to shake up the multibillion-dollar global wheat market. Bulging silos are pushing producers to seek new markets, and cheap oil is bringing down transportation costs. The surging greenback is undermining farmers in the U.S., the world’s second-largest exporter of the dollar-denominated commodity behind Canada, making grain from Russia to Argentina more competitive.
Meanwhile, French grain is turning up in Indonesia and Russian grain in Nigeria. On Thursday, a rare cargo of Argentine wheat arrived in Wilmington, N.C. The U.S. imports about four million tons of wheat a year, while it consumes more than 30 million tons, according to the U.S. Department of Agriculture.
This crop year, Russia is poised to become the world’s largest exporter. U.S. wheat exports are forecast to slump to a 44-year low, to 21.8 million metric tons, according to the USDA, while Canada is projected to export 20.5 million tons, from 24.1 million the year before. Russian exports are projected to rise 3%, to 23.5 million tons, according to the USDA.
ENLARGE“There is a lot of wheat out there, and it all comes down to price,” said Mr. Harvey, the chief executive of Singapore-based miller Interflour Group Pte.
The price of Chicago-traded wheat futures fell to five-year lows in December. On Friday, wheat for March delivery fell 6 cents, or 1.3%, to $4.6675 a bushel on the Chicago Board of Trade, up 3.2% from that Dec. 2 low.
As the price of wheat has fallen, the dollar—which rose in late January to its highest level against other major currencies in more than 13 years, according to the WSJ Dollar Index—is making U.S. wheat more expensive for buyers using other currencies.
“Unless emerging-market currencies stop falling, the U.S. will lose more export market share and will begin to see more foreign product coming in,” said Michael McDougall, director of agricultural commodities at Société Générale SA in New York.
Consumers appear to be benefiting from the cheaper wheat, which is used to make bread, pasta, as well as animal feed.
The United Nations Food and Agriculture Organization said on Thursday that the grain glut and increased competition helped push food prices to near seven-year lows in January.
Global stockpiles of wheat rose to 213 million tons in the 2015-2016 crop year, the highest level in data going back to 1960, according to the International Grains Council. Inventories are expected to dip only slightly to the second-highest level ever in the 2016-17 crop year, amid favorable harvest prospects, the council said.
The reshaping of trade routes has been greased by a 20-month slump in crude prices that has brought down freight costs. The Baltic Dry Index, which measures the price of moving raw materials by sea, hit its lowest level on record on Thursday. Last month, traders offered to ship wheat from France to Egypt for $7.59 a ton, compared with $13.75 a ton a year earlier.
The moves follow years of high prices, as demand from China and other emerging markets increased at a fast clip. But as with other commodities, from oil to copper, oversupply pushed wheat prices down and unleashed a battle for market share.
To be sure, the trade balance could shift again on the back of catastrophic harvests, a fall in the dollar and a rebound in oil. But few are predicting that in the short term.
Pushing to take the place of U.S. grain is Russia, whose currency, the ruble, touched its weakest-ever level against the dollar in mid-January.
With their crop so cheap, Russian wheat is pushing into places it hasn’t been in many years, if ever, while grabbing a larger share of established markets, such as Egypt. That includes markets traditionally dominated by the U.S., which was supplanted by Canada last year as the world’s biggest wheat exporter.
“This season we’re selling more to distant destinations like Nigeria…and we also supplied some wheat to Mexico,” said Andrey Sizov, managing director of Russian agriculture consulting firm SovEcon.
That is hurting U.S. farmers, contributing to the 38% fall in farm income that the USDA forecast happened last year.
The U.S. is also seeing renewed competition from Argentina. Last December, newly elected President Mauricio Macri lifted capital controls that allowed the peso to fall by nearly a third against the dollar in one day. He also eliminated a 23% export tariff on wheat.
Other Western producers are being hit hard.
During the last crop season, which runs from July to June, France supplied 40% of the wheat bought by Egypt, the world’s biggest wheat importer. This crop year, it took until November for France to sell its first cargo to Egypt.
That November sale was helped as the euro fell against other currencies. But any hope that French exporters had turned a corner was dashed in December, when Mr. Macri’s overhauls sent a wave of Argentine grain onto the world market.
“France should have won, but now Argentina was there, $5 cheaper,” said Gabriel Omnes, an analyst at French consulting firm Stratégie Grains.
It was around that time that Mr. Harvey of Interflour ordered his first Argentine cargo since 2009.
“We are looking for new suppliers all the time…and now we have so much to choose from,” he said.
SOURCE: Wall Street Journal
