As global wheat prices continue to push higher on supply concerns driven by export bans, severe weather disruptions and fertilizer shortages, we look at the outlook for the crop and how it will affect seaborne exports.

The USDA last week released its latest WASDE report which included fresh revisions to the current state of major agriculture markets. Export forecasts for the current marketing year were reduced by 3.2 MMT to 199.9 MMT. Within the release are fresh forecasts for the 2022-2023 marketing year, in which the association estimates global wheat production will decline for the first time in four years to 774.8 MMT. Prices reacted firmly to the upside thereafter by 5.4% to $12.31 per bushel on the CME exchange. Year-to-date, front-month wheat futures prices have increased by 62.4%.

Global wheat imports across the first four months of the year totaled 42.2 MMT, declining by 5.3% YoY. In comparison, bulk carrier demand from wheat, measured in dwt days, increased by 7.9% YoY. This has been buoyed by the re-emergence of wheat shipments out of South America, as shipments from Argentina nearly doubled in April to 2.2 MMT, with the majority heading to Indonesia, a very demand-intensive trade for the smaller vessels. Chinese bulk carrier demand from wheat, what has been relatively muted so far in 2022, increasing by just 1.6% YoY from January-April, may get a boost in the coming months. Concerns over Chinese wheat output, due to flooding, could spur additional buying from the country on the seaborne market across the summer months. So far China’s wheat of choice has been from Australia, with shipments in April more than doubling YoY to 643k tonnes. 

India announces export ban

While we had previously expected India to boost wheat exports following the surge in global prices, the country only managed to ramp up liftings for little over a month. Worsening crop conditions in the country has now caused the government to implement an export ban, apart from shipments in which credit has already been issued. The worsening weather outlook in the country, a severe heatwave, has raised fears of a worse-than-expected yield for the current marketing year which subsequently moved domestic prices higher. This leaves buyers worldwide with even more limited options to purchase from. Australia and the US now remain as the only major exporters that can support buyers avoiding Russian crop aiming to replace crop from the Black Sea.

April saw the highest level of wheat loaded in Indian ports on record, totaling 769k tonnes, with even more of the crop now stuck in ports that will be re-distributed back to the domestic market. This figure in April would likely have been even greater but port infrastructure was not sufficient in dealing with these large volumes. Most cargoes headed to Southeast Asia, with Indonesia a strong buyer. Bulk carriers have benefitted from considerable demand on this route from elevated coal trade, with wheat stems going in the opposite direction having also provided a boost to employment until the ban was put in place.

Russia still exporting

As we have previously noted, Russia continues unsanctioned by its major wheat buyers. As a result, these volumes have continued to be exported from the country’s Black Sea ports. In April, Russian wheat liftings totaled 1.7 MMT, rising by 74.4% YoY and the highest monthly total so far this year. In terms of destination, Egypt, Iran, and Turkey made up the bulk of the volumes. With shipments appearing strong so far since the invasion of Ukraine, liftings in the second half of the year are also expected to be unaffected, when most Russian wheat is shipped. Earlier this week, forecasts for the next Russian wheat crop were raised to 88.6 MMT because of better-than-expected weather conditions in the country.

European estimates lower

Since the invasion of Ukraine, buyers have looked towards the EU as an alternate source of wheat to replace Black Sea crop. However, so far in 2022, USDA estimates for European wheat have consistently fallen, with export forecasts falling 6.5 MMT to 31 MMT from January-May. In April, European countries exported 664k tonnes of wheat, falling 50.1% YoY. Due to the downward revisions, we now estimate European seaborne exports for 2022 at 14.8 MMT, which would represent an 8.5% decline YoY if realized. With wheat stocks in the bloc already low, the region’s export potential is reduced, with some countries likely holding some crop in reserve. Dry weather in France has raised concerns over Europe’s ability to help replace Black Sea supplies. In some regions of France, councils are reportedly considering implementing water restrictions that would include agriculture as a result.

Outlook

Around the world food security is continuing to become more and more imperative. If this trend continues, wheat, amongst other key grains, may see export declines particularly if prices remain elevated, with countries opting to prioritize domestic prices as we have seen in India. For 2022, we see a 15.3% decline in wheat shipments on the basis only minor volumes will make it out of Ukraine by barge or rail to other ports for export such as in Romania and Bulgaria. Ukraine is also facing a food supply shortage, and thus is opting to keep most food stocks in the country.

Following their first release of 2022-23 marketing year forecasts, the USDA estimate the first decline in wheat production in four years. So far, export forecasts remain unaffected. Something to consider is the mounting pressure on fertilizer supplies across key grain producing countries, including for wheat. Although less vital than for corn, for example, fertilizers still play a significant role in obtaining strong wheat yields. Any worsening of this situation would further reduce wheat output expectations and subsequently exports.

Since the war started, we have entered the South American grain exporting season, thus the smaller vessel sizes have continued to see demand as we would typically have seen. Only once the conventional Ukraine grain exporting season arrives will we see the true effect of the loss in volumes. From August-December 2021, Ukraine exported 26.9 MMT of grain by sea. At this point, it is difficult to pinpoint where extra demand can be generated to make up this loss in the second half of the year if Ukrainian ports remain shut as expected. Vessels that typically would do Black Sea stems during this period will naturally need to look elsewhere, filtering more supply into other regions.