As I noted yesterday, high-quality wheat supply is bit lacking in Russia.
For the U.S., well it’s hard to find a lot of wheat that hasn’t been planted.
Let’s look at why Russian wheat trade is going to keep expanding.
I’ve described Russia’s agricultural minister as a man changing gasoline prices after a hurricane. He’s up on the ladder, and he just keeps adding numbers.
Over the last five years, Russia’s wheat acreage has surged.
A 5% annual growth rate pushed Russia’s 2017 acreage number to 79 million acres. The country, in turn, produced 72 MMT of wheat.
Here’s the thing: The country probably has another 50 million acres that are NOT being used. And it’s expected that Russian farmers are going to bolster their production in the years ahead for three key reasons.
1) They’re afraid of losing market share at a time that the global wheat game is shaking up. We’ve discussed this before, but Russia, Argentina, and Canada are making major leaps in production and exports. Russia wants to be the top producer, and there’s a strong sense of nationalism when it comes to this title.
2) They don’t want to shift to other crops like corn and soybeans because they have the tools and machines in place to be successful for growing wheat (albeit, we have noted the growth of Russian soybean acres in the past)
3) Crop rotation in Russia is a bit more complex than in North America.
There are other advantages that Russia has right now as well. Its proximity to the Middle Eastern customers, better tax advantages, cheaper land, and significant investment interest are just a few.
As much as it hurts to say it, this is the future.
Moving forward, the question is how you can differentiate yourself in this market.
U.S., RUSSIAN WHEAT ACREAGE GAP SEEN WIDENING
The answer to the question, “How did it happen that Russia and Ukraine increased their wheat production during the last 10 to 15 years?” is this: They have their huge territories. Russia is the biggest country in the world in the sense of its area, and Ukraine is the biggest country in Europe. What other crops but grain can be grown in rural areas of tens of millions of acres? Grain is simple to grow, store, and transport compared with other crops such as fruits and vegetables.
Russia and Ukraine are located very close to the important wheat markets in the Middle East and North Africa. They have also expanded their wheat exports to east and southeast Asia.
During the last five years, the wheat acreage in Russia strongly increased by 5% annually. In 2017, there were 79 million acres on which were produced 72 million tons of wheat (up from 64 million tons on 76 million acres in 2016). Potentially, Russia has about 50 million acres more of productive land that now are out of operation.
The wheat acreage in Ukraine is stable at about 15 to 16 million acres (of which 15 million acres are under winter wheat). In 2017, Ukraine produced 26 million tons of wheat.
Because 95% of the Ukrainian agricultural land is already in operation, there is no room for its further increase.
The increase of the Russian and Ukrainian wheat exports is caused by the weak local currencies (during the last three years the Russian ruble devalued two times, and the Ukrainian hryvnia more than three times) and the closeness of their main importers.
Though the wheat prices are weak, there are several factors that push Russian and Ukrainian wheat growers to continue to expand their businesses.
• There is a fear of losing their markets to competitors. It is easy to lose but difficult to regain.
• Wheat is produced mainly by the big agricultural companies that have big fleets of the necessary implements and machinery. The shift to growing other crops (e.g. corn, soybeans, etc.) will require them to make new investments, leaving the existing fleets of machinery and implements unused.
• In Russia and Ukraine, the agricultural companies use more complicated crop rotation schemes than in North America or Europe. For example, crop rotation schemes may include winter wheat, corn, sunflowers, barley, and something else. Such crop rotation schemes also provide a natural hedge against unfavorable weather or market conditions.
Though Ukrainian and Russian wheat are of a significantly lower quality (11.5% protein vs. 13.5% protein in American wheat), this is completely compensated by its significantly lower price (about $60 per ton) compared with American wheat. Moreover, even the very low, feed quality of Ukrainian and Russian wheat may be blended with the high-quality wheat to produce a baking quality flour or otherwise used for ethanol production.
So, will the expansion of the Ukrainian and Russian wheat export continue? The answer is yes.
During the last decade there were massive investments in wheat production including investments in new machinery, fertilizers, pesticides, and seeds.
There were huge investments in the infrastructure including storage facilities, export terminals on the Black and Azov seas, plus transport (trucks and river barges).
Finally, keep in mind that Ukrainian and Russian wheat growers have some very strong advantages compared with their American counterparts.
Those advantages include big producers are direct grain exporters, land is cheaper, and the tax burden of the Ukrainian producer is minimal vs. the U.S. wheat farmer’s.