A New Wheat Export Tax Rallies Wheat
Wheat markets had a very strong finish to the second week of trading in December as the monthly WASDE report, combined with rumours of a wheat export tax out of Russia, provided the foundation for the bulls to have a run. In the December WASDE report, there weren't many surprises as the USDA more or less met most of the market's expectations. More specifically, a lot of attention right now is on South American weather and Chinese demand, the USDA helped confirm it, but there weren't really any bullish surprises for corn and soybeans, which is why they fell on the futures board. However, wheat was able to gain on the bullish headlines, despite the raised production estimates for Canada, Australia, and Russia.
On that note, the USDA acknowledged that these countries' respective wheat harvests of 35.2 MMT, 30 MMT, and 84 MMT are each the second-largest outputs they've ever had (As mentioned in last week’s Wheat Market Insider column, government agencies in Canada and Australia raised their local wheat harvests to 35.2 MMT and 31.2 MMT, respectively). Accordingly, the 2020/21 global wheat harvest of nearly 774 MMT is a new record, but consumption is also set to rise to a record of 758 MMT, largely thanks to stronger feed & residual use in the E.U. and China, as well as in Australia. Accordingly, global ending stocks were felled by about 4 MMT from the November WASDE to now sit at 316.5 MMT.
Russia hogged the headlines though as the wheat export tax proposed in Moscow is aimed at stabilizing domestic wheat prices (not to mention bringing in some much-needed government revenue), and would add anywhere between $25 - $30 USD/MT to export price of Russian wheat. The proposed plan would be a “one-size, fits all” sort of tax, regardless of the class of wheat, which is a departure from the formula-based export tax used a few years ago when domestic wheat prices were also high. To contextualize this, Russian 12.5% protein wheat is currently being offered out of Black Sea ports at price of $252 USD/MT (or via GrainUnitConverter.com: $322 CAD MT, $8.75 CAD/bushel, or $6.85 USD/bushel).
Accordingly, Russian wheat prices are fairly competitive with current Canadian port prices for similar quality wheat, but putting this tax on wheat exports starting in mid-February would likely raise the prices for other exporters (and hence the rally on the futures board). With Russian wheat more expensive, international buyers might switch origins, and while there are obvious change freight cost changes to account for, it’s abundantly clear that Canadian grain continues to move very reliably. In fact, through Week 18, Canadian total wheat exports (including durum) are tracking nearly 20% higher than a year ago with almost 9 MMT moved out of country. More specifically, non-durum exports are tracking 21% higher with 7.02 MMT shipped, while durum exports are up 9% with over 1.95 MMT moved.
Wheat isn’t the only Canadian crop that’s seeing higher exports: barley shipments are more than double what they were a year ago with 1.4 MMT shipped out; 861,000 MT of oats exports thus far is a 34% increase; and canola exports are nearly 40% higher with almost 4.5 MMT sailed. This strong export demand is making things more competitive for domestic markets, especially for feedstuffs. When you factor in the higher global corn/feedstuff prices and less feed-quality from this past year’s Canadian harvest, feed wheat prices on our Combyne Ag Trading Network are now close to last year’s record in Feedlot Alley and are already trading at new records in other regions across Western Canada. I think that there may be some more room to run yet for feed grain prices in this demand-driven rally, but it is worth being cognizant of what happened to in January/February 2019 when we last saw these record values.
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