Russian wheat yield data for the first time in weeks no longer suggests an ever-rising harvest! However, USDA’s latest forecast is still a bit understated. It’s been a special year in Russia, and weather (which was rather benign) combined with farming practices and likely improved seed have pushed Russian wheat yields to historical records. ARC pegs Russia’s wheat crop at 83 MMTs, up 2 from USDA, and which will further add to 17/18 carryover stocks – I mproved logistics, which are coming longer term, will not aid exports through the balance of the crop year. We further note that the trend in Russian wheat yield far outpaces all other FSU countries, and so Russia will be remain a sizeable wheat exporter in 2018/19, even if the harvest declines 15% to 70 MMTs. However, in spite of record ending stocks, ARC’s work suggests Russian wheat prices have found fair value, and like recent years seasonal lows were scored in late August. Russian farmers are storing!
But a bearish CBOT wheat outlook is not advised. The ruble is up 11% from September of last year, which is a small but important change. Wheat in Southern Russia’s domestic market this week is pegged at 9,000 rubles/MT, which a year ago would be comparable to $138/MT. Currently, and due a stronger ruble, replacement costs in Southern Russia are pegged at $158-159/MT. This $20/MT difference has already had a significant effect on the price Russian exporters are willing to sell at (spot Russian fob offers are up a similar $20/MT over last year). And notice (attached) that current prices align rather well with Russian wheat stocks/use in 17/18. Russian domestic prices have fallen some $11/MT (7%) from late summer, but further downside risk is limited. Support in Russia, of course, will spill into the rest of the world wheat market. This further underscores the importance of currencies in ag price and profit determination. Russian farmers are not cutting back on ’18 seedings.
So the Russian wheat balance sheet is not as bearish as it may seem, and we note that, seasonally, there’s a very strong tendency for the market to rally 5-10% during the Sep-November quarter. Already Russian fob offers are up $6/MT from early Sep lows, as Russian exporters find demand there’s simply no reason to lower offers in the near/medium term. However, what’s more important is the size of Russian carryover stocks, which will be a record large 18.6 MMTs this year. Even assuming Russian wheat yields next year are much closer to trend, Russian wheat exports will stay at/near record large levels. To cut 2018 Russian wheat exports below 30 MMTs, a crop of less than 65 MMTs is required, which in turn requires a yield some 7-8% below trend. ARC is neutral US/world wheat prices long term, but the point is that it’s going to be tough to sustain rallies of more than 30-40 cents without widespread/severe adverse weather next spring. Keep this in mind amid periodic short covering rallies when pricing 2018 production.
