CBOT wheat futures spent much of last week in a choppy sideways pattern in a range between 530 and 550 USc/bu. This is well down from the peak in the market seen earlier in the month when prices spiked up to 593 USc/bu on the September contract.
That all changed on Friday night, when prices surged 18 USc/bu on the day, to close around 560 USc/bu (close to 580 USc/bu on the December contract).
The driver for the turnaround was a report suggesting that Russian government officials had met with grain exporters to discuss export volumes for the current year. The suggestion is that exports may be limited if volumes get too high, so that domestic supplies are assured, and domestic prices remain at reasonable levels for consumers.
One of the changes in recent years has been the development of the livestock sector in Russia, to take pressure off meat imports. As a result, the livestock lobby has strengthened with grain supply and price a more sensitive issue than when Russia last intervened to limit exports six years ago.
At this stage it is business as usual, but the suggestion is that when total grain exports (mainly wheat and barley) hit 30 million tonnes, the situation will be reviewed again.
That would leave wheat exports at around 25mt, which is well down on the USDA estimate of 2017/18 exports of 42mt, and down on their projection of 35mt this year.
The market reacted sharply as they assessed where any shortfall in exports may come from. Initially any restriction on exports from the Black Sea would be covered by the EU, but their ability to pick up any slack is severely limited this year. That pushes the business back to the US, and so the sharp reaction seen in US futures markets.
In its August reports, the USDA pegged Russian wheat production at 68mt. This is still a big crop for them but is down sharply from an estimated 84.99mt last year. Domestic consumption is forecast at 38mt this year against 45mt last year. That allows 35mt of exports (42mt last year).
The problems with those numbers are that it assumes Russian domestic consumption will pull back sharply, and it assumes that Russian stocks will be allowed to fall to just 4.82mt.
If Russian domestic consumption does not fall as sharply as the USDA is projecting, then the balancing number will have to come from reduced exports. Similarly, if stocks are to be held at a higher level, it will also mean that exports will have to be cut back.
All in all, there is probably some merit in the suggestion that the Russian government will monitor the pace of exports closely, and act swiftly to protect domestic interests if it sees the need.
Meanwhile, the exporters will probably position themselves to increase the pace of exports ahead of any restrictions. In the short term that will continue to cut the US out of key markets and keep pressure on international prices. It will also hasten the inevitability of government intervention.
The risk of Russian exports being curtailed is real, and the US is the only major exporter in a position to cover the gap. If it unfolds that way it will be supportive of CBOT futures prices.
