The question I was asked most was a simple one – why isn’t wheat $400/t?
When roughly 30% of the world’s exportable wheat supply is effectively landlocked, it is a fair question.
The answer, as it often is, is convoluted and full of “ifs”.
The wheat market is wrestling with the distinct possibility that the longer the Black Sea conflict continues, the more likely alternative pathways to export will be found. They may be more expensive and arguably a more fragile supply chain, but eventually the wheat will move.
The question is when. The risk for Australian farmers is that an avalanche of cheap new-crop Black Sea wheat hits the global export pipeline at the same time as Australian exports normally ramp up.
The second compounding issue is demand.
As I have mentioned previously, nearby demand for Black Sea grain has been muted this year because many importing countries across the Middle East and North Africa have enjoyed good domestic harvests. The demand that does exist is largely for prompt delivery through September and October, which rules out much of Australia’s new-crop wheat. Some carryout grain in Western Australia may benefit, however.
Last night, market wires reported a rare sale of French wheat to Sudan. Sudan would normally be supplied directly from the Black Sea, so this may be an early indication that alternative origins are starting to pick up business.
That is a key point. The longer the conflict disrupts the normal flow of grain, the wider the net will be cast to secure supplies — until the Black Sea supply channel is restored.
So, back to the original question – why isn’t wheat $400/t?
Global FOB prices have been slow to react to the disruption. Australian wheat remains expensive relative to European and Argentine origins, while the prospect of large volumes of Black Sea grain eventually returning to the market — or even rumours that it might — continues to keep the trade nervous.
It is difficult for the market to sustain a rally when buyers believe cheaper supply could reappear at any time.
A final word from Andre Sizov (SovEcon). He wrote recently “The persistent hopes of a significant number of market participants that the situation in the Azov and Black Sea would return to normal have been confronted with the inescapable reality of even greater escalation. The market is severely underestimating this situation.”
Black Sea Gridlock: Why Isn’t Wheat $400/t?
The question I was asked most was a simple one – why isn’t wheat $400/t?
When roughly 30% of the world’s exportable wheat supply is effectively landlocked, it is a fair question.
The answer, as it often is, is convoluted and full of “ifs”.
The wheat market is wrestling with the distinct possibility that the longer the Black Sea conflict continues, the more likely alternative pathways to export will be found. They may be more expensive and arguably a more fragile supply chain, but eventually the wheat will move.
The question is when. The risk for Australian farmers is that an avalanche of cheap new-crop Black Sea wheat hits the global export pipeline at the same time as Australian exports normally ramp up.
The second compounding issue is demand.
As I have mentioned previously, nearby demand for Black Sea grain has been muted this year because many importing countries across the Middle East and North Africa have enjoyed good domestic harvests. The demand that does exist is largely for prompt delivery through September and October, which rules out much of Australia’s new-crop wheat. Some carryout grain in Western Australia may benefit, however.
Last night, market wires reported a rare sale of French wheat to Sudan. Sudan would normally be supplied directly from the Black Sea, so this may be an early indication that alternative origins are starting to pick up business.
That is a key point. The longer the conflict disrupts the normal flow of grain, the wider the net will be cast to secure supplies — until the Black Sea supply channel is restored.
So, back to the original question – why isn’t wheat $400/t?
Global FOB prices have been slow to react to the disruption. Australian wheat remains expensive relative to European and Argentine origins, while the prospect of large volumes of Black Sea grain eventually returning to the market — or even rumours that it might — continues to keep the trade nervous.
It is difficult for the market to sustain a rally when buyers believe cheaper supply could reappear at any time.
A final word from Andre Sizov (SovEcon). He wrote recently “The persistent hopes of a significant number of market participants that the situation in the Azov and Black Sea would return to normal have been confronted with the inescapable reality of even greater escalation. The market is severely underestimating this situation.”
Next week
This remains a very tricky market to navigate. Those holding out for significantly higher prices could ultimately be disappointed. For now, the market is pricing in the assumption that, one way or another, the grain trapped in the Black Sea will eventually find its way onto the world market.
The question is not whether that grain will move, but when — and what happens to prices when it does.
Have any questions or comments?
Click on graph to expand
Click on graph to expand
Click on graph to expand
Data sources: Next Level Grain Marketing, Reuters, CRM Agri, SovEcon, Bloomberg, Mecardo
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