Are You F***ing Kidding Me Russia?

Back in July, wheat prices were kicking into high gear.

You might recall that we warned retail investors to ignore recommendations to purchase the Teucrium Wheat Fund ETF (a bet that wheat prices would go even higher).

The basic argument was that the analysis was flawed. The belief that food prices will just keep going up and up and up over the long-term is not enough to justify a buy-and-hold in a managed fund that will cost you money.

But there was another elephant in the room that we didn’t discuss.

Actually… it’s a bear, both as a bearish factor and the symbol for the nation that has had the most dramatic impact on wheat prices in 2017.

While many traders may be looking for a pop in short-term prices, the story of Russia is one that will resonate across the global markets in the years to come. Not only has Russia established itself as the largest exporter of wheat on the planet, but they are setting the stage for supremacy in the agricultural markets.

Don’t ignore the Russian bear.

Sanctions a Boon for Wheat Producers

You don’t need me to tell you about the rocky relationship between the United States and Russia. There are entire academic departments dedicated to geopolitical tensions between the countries over the last century and enough books on Amazon to keep you busy through retirement.

But the reemergence of Vladimir Putin as President has tightened his control over the country and renewed “Cold War” rumblings.

The Obama administration did a rather dismal job at “resetting relations, ” and current investigations indicate that Russian hackers played a role in influencing the 2016 United States Presidential election in some capacity.

The agricultural hook to this story is tied to the economic sanctions imposed by the United States on Russia. At a time that the U.S. Dollar had shown remarkable strength leading up to the Federal Reserve’s interest rate hikes last year, Russia’s ruble was struggling.

The lower Ruble was a boon for the export of commodities this year, mainly wheat. While Australia and the United States were hindered by drought conditions in main-growing regions, the Euro had pressed to two-year highs against the greenback. High production and lower prices were attractive to buyers.

But Russia had already made its move.

In July 2016 to June 2017, the country exported 27.8 million metric tonnes of wheat. This figure was more than the entire wheat exports of the European Union. It was the first time that Russia had topped the EU since the formation of the world’s largest economic bloc.

The country is also expected to pass the United States as the largest individual wheat exporter in 2017/18. The only other time that’s happened in history was 2 years ago.

Ask the average person with a slight understanding of global commodities, and they won’t associate food production with Russia. The first thing that people think of is oil and natural gas, the latter being an important bargaining chip in all relations with Eastern Europe.

But Russia – along with Ukraine and Kazakhstan (the RUK) – have become dominant forces in the global grain markets. In fact, Alexander Tkachev, Russia’s agricultural minister, projects that he foresees a day when grain replaces oil as the nation’s largest source of export revenues.

Two factors are driving this belief. The dramatic increase in global grain demand… and one worldwide phenomenon that I’ll mention in just a minute.

But first, it’s critical to show just how significant Russia’s role in the grain trade has become.

Tracking Russia’s Grain Rise

Back in 2005, the Kremlin said that agricultural would become a national priority. The nation blessed vertical integration and adopted western technologies to improve yields across the country.

As a result, we’ve seen a dramatic increase in wheat production over the decade.

A decade ago, back in the 2006/07 marketing year, the USDA projected that Russian wheat production would hit nearly 45 million metric tonnes.

In July 2017, the USDA projected that the country would produce 72.0 million metric tonnes for the 2016/17 marketing year.  [1]. Two months later, in the September WASDE report, the USDA projected that Russia’s 2017/18 wheat output would hit 81.0 million metric tonnes. [2]

The total Russian harvest for all grains is pegged between 125 million and 127 million tonnes. [3]

This massive output accompanied drought in Australia and the United States and gave Russia a distinct advantage in selling wheat to countries like Egypt, Nigeria, and nearly all of Asia, including major importers Bangladesh, and Indonesia.

The growth has accelerated so quickly that Russia has experienced infrastructure challenges that will require increased investment. With a total grain production of 117 million metric tonnes in 2016, the nation has attracted large international trading houses like Olam International, Cargill, and Glencore.

Kansas State University reported last year that the combination of soil quality, government support, and proximity to Black Sea shipping points could reduce the cost of procuring grain to the Middle East by as much as 50% compared to other major exporting countries. [4]

SovEcon reported that Russia’s infrastructure – all of its rails and ports – have been working at maximum capacity. To accompany expected increases in agricultural output, the government has financed increased port capacity and storage. Infrastructure spending along the Black Sea is experiencing a rise in export terminals and silos. That said, SovEcon has predicted that bottlenecks and constraints to their supply chain will become more visible in the months ahead.

Given that companies engaged in the middle of the supply chain are expected to see very good returns this year, one should anticipate a rush of capital to relieve the stress in the region.

But it’s not just infrastructure at home that will aim to bolster Russia’s presence. Reportedly, the nation is discussing grain infrastructure projects in Egypt, which would entice and reward one of its largest customers.

Other projects have been rumored in Iran and other parts of the Middle East, where grain demand is expected to surge over the next few decades.

But there’s one other factor that makes you realize just how hellbent that Russia is on becoming now just an agricultural superpower but THE superpower.

At a time that political leaders around the globe are panicked about climate volatility, Russia is welcoming dramatic weather shifts to benefit its growing agricultural sector. 

Russia Wants a Hotter World

There’s more to just infrastructure and huge harvests that have attracted attention.

In a world where nations are actively aligning together to combat climate change, the Russian government is embracing it.

For Russia, warmer temperatures are welcome. Anyone who has been in St. Petersburg in the middle of December when it’s nothing but perpetual darkness and freezing temperatures would understand their sentiment.

Russian officials are so adamant about melting ice that they will probably declare a national holiday and force citizens to take hair dryers to the snow and bolster their national carbon footprint.

While the United States sees hotter temperatures like we saw this summer in the Northern Plains as a detriment to U.S. wheat production, warmer weather would be a major factor in bolstering Russian wheat production.

Sure, there’s the pesky issue of melting ice in Russia’s less populated areas releasing methane into the atmosphere, but the amount of arable land would increase dramatically.

A report from the University of Illinois released in 2011 indicated that global warming could add 400,000 square miles of new farmland.

That’s about 50% larger than the state of Texas.

So put 1.5 Texases together, and that’s all NEW farmable land.

256 million new acres to be precise!

But there are other areas of Russia, Ukraine, and Kazakhstan that will benefit from the combination of temperature changes and technological advancement.

Bloomberg reported earlier this month that roughly 140 million acres of cropland were abandoned in those three countries after the fall of the Soviet Union.

In the future, better technology, increased investment, and lower development costs could bring these lands back online.

The potential production figure is staggering. Moscow has said that it anticipated annual harvests of 150 million metric tonnes by 2030.

By 2050, Russia predicts it could see total harvests of 205 million metric tonnes.

Who Cares About Wheat Anymore?

What we do know is that corn and soybean acres are eating North and South America.

Subsidizing production by means of supporting ethanol mandates will continue to ensure corn gets planted in the Western Hemisphere on both sides of the equator.

For soybeans, a clear demand factor has emerged, and its name is Asia.

Leading the charge is China.

In the last 20 years, Chinese soybean imports have gone from just under 3 million tonnes to a forecasted 95 million tonnes in 2017/18.

Back in 2000/01 US soybean exports to China were a touch under 900,000 MT. That represented 20% of total US soybean exports.

In the 2017/18 marketing year, the US is expected to ship out about 61 million tonnes of soybeans. Roughly 35 million tonnes of that could be shipped to China alone.

To be clear, US soybean exports to China, in less than 20 years, have increased nearly 4000%. As a percentage of total exports, America’s dependence on China as a go-to soybeans market has increased three-fold.

While US and Brazil account for the vast majority of China’s soybean imports, Russia may have a hand in future trade.

Russia is expected to produce 3.9 million tonnes of soybeans this year.[5]

It would be their second consecutive record crop. Average yields only look to be 23.2 bushels per acre, but that’s 19% better than the 5-year average.

What Will Happen To Wheat Markets Now?

Russian wheat yields this year are pegged at about 25% above their 5-year average.

Currency factors will continue to play a major role in Russia’s ability to have a major hand in global grain markets.

Regarding production, global demand for specific crops will play a significant role in dictating what gets planted and harvested in Russia. Currency fluctuations will certainly be a factor in this but not as much as the demand factor.

While there are certainly geopolitical risks to consider, Russia has emerged as a country that has little to no intention of slowing grain production down.

While wheat production in the likes of Canada and the USA haven’t retreated, their ownership of the world wheat export market has declined substantially.

russia-wheat-exports-expoloding
Major wheat exporters the last 20 years and exports as a % of total production (click to zoom)

 

Comparably, Russia wheat exports will continue to tick ahead, assuming that infrastructure development can keep up.

If the eastern regions of Russia are opened up to farming, their share of global wheat export markets will likely only continue to grow.

Further, there continues to be growing chatter about more rail movement of wheat to Asia. COFCO, China’s state-grain buying agency has already publicly stated that it intends to buy 2 million tonnes of wheat from Russia every year.

Today, we already know that 40,000 MT of Kazakhstan wheat has been getting railroaded into China each month. [6]

Ultimately, it’s hard to see Russia’s grain production slowing down, especially considering how they continue to surprise us with bigger crops. Looking further out though, Russia isn’t likely to just have a significant impact on the wheat market, but others as well.

It’s clear that soybeans are the new wheat from a global demand perspective (or at least in Asia, as driven by China). It took Russia a few decades to get their act together on wheat, but now they’re a major player.

Could they do the same thing in the soybeans market in half the time?

Yes, if export infrastructure development and arable acreage expand.

What seems certain though is, given the trend, we could be shocked at next year’s numbers out of Russia again.

About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.

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