Russia Continues to Dominate the Grain Market
In the week before the USDA released the latest chapter in its Intriguing but never-ending world agricultural supply and demand story, it was Russia that took central stage, confirming plans for the introduction of grain export quotas in the new year, as well as possible changes to the existing export.
Food inflation in Russia is at a five-year high, prompting the strengthening of export restrictions. In order to ration supplies, the global wheat price continues to climb. The new policies are intended to reduce inflationary pressures by expanding supply to domestic customers and bolstering upcountry inventories.
The statement by the Ministry of Agriculture on Wednesday caused some market misunderstanding about the planned limits’ true start date, as it mentioned January. The exact specifics of the export limitations on a variety of commodities, including wheat, are expected to be finalised in December and disclosed in January. The new export quotas are set to begin on February 15, as previously announced, and will last through the conclusion of the 2021/22 marketing year on June 30, 2022.
The final 2021/22 output and the speed of exports in the first six months of the marketing year will decide the amount of the wheat quota. The Russian government cut its wheat output forecast to 75 million tonnes in late October, down 10 million tonnes from the previous season. This is in line with market expectations, with private forecaster Sovecon predicting 75.5 million tonnes, the Institute for Agricultural Market Studies (IKAR) predicting 75–75.6 million tonnes, and the USDA predicting 74.5 million tonnes, up 2 million tonnes from its October forecast.
Moscow has two alternatives if the global wheat market continues to surge, which is extremely likely given the present supply and demand mismatch. It has two options: lower the base price, which is now $200 per metric tonne for wheat, or hike the 70 percent tax rate. Or, I suppose, the government might do both; such is the unpredictability of Moscow’s leadership.
A tighter global wheat balance sheet collides with a weak domestic output year, creating a problem for Russia. In recent years, Russia has become the world’s largest wheat exporter. Importers are interested in Russian grain, but Russian farmers refuse to sell. They understand that when international wheat prices rise, exporters will be able to pay more for their crop. In theory, for every dollar rise in the export price, the farmer bid should climb by 30 cents. However, if the exporter is under pressure, it will almost certainly be higher. Of course, the Russian government receives the remaining 70 cents.
Although reliable and timely data is difficult to come by, Russian wheat exports allegedly totaled 15.3 million tonnes in the first four months of the 2021/22 marketing year. This is about 19 percent less than the 18.8 million tonnes delivered during the same period previous season. Wheat exports from Russia’s Black Sea ports are already decreasing as the export duty rises dramatically every week.
And, once Europe’s winter cold comes in, maintaining the current rate of wheat shipments will be untenable. Even a monthly export rate of 3 million tonnes would be rather optimistic, putting exports at 25.8 million tonnes by the time the restriction is implemented on February 15. When the $60/t flat export tax was implemented earlier this year, Russia only exported 2.5 million tonnes of wheat from March to May. By the end of the season, the floating tax might reach $100 per tonne, or perhaps more.