In the past few weeks, we’ve looked a couple of the major themes outside of North America when it comes to the wheat market.
Specifically, we’ve examined:
• The rise of Russian wheat production and its King Exporter title over the past 20 years;
• A similar rise in Ukrainian wheat production and exports; and
• The role of Egypt in international wheat markets.
What’s up with the North American wheat trade?
That was the question asked by a reader after we covered that Egypt topic at FarmLead Insights last week. It’s an important one to consider. Especially as we build out our analysis for wheat sellers across the continent. FarmLead Insights last week. It’s an important one to consider. Especially as we build out our analysis for wheat sellers across the continent.
There are two key factors that we must discuss before we get to price expectations heading into the new year.
First, what is the state of North American wheat trade?
Second, what markets will the U.S. and Canada shift their focus to with Russian production and exports booming?
Let’s jump right in.
North American Wheat Trade: A Lopsided Relationship
When it comes to North American trade between the U.S. and Canada, it’s a very one-sided relationship. In fact, the amount of U.S. exports to Canada is just a drop in the bucket compared to shipments going in the other direction.
As the chart below notes, Canadian wheat exports to the U.S. have been significantly higher than shipments in the reverse direction. The USDA notes that Canadian wheat exports to the U.S. between mid-2012 and mid-2015 showed an annual average of 3.31 million tonnes.
The average volume of wheat shipped from the U.S. to Canada during that period was just 53,000 tonnes.
Make no mistake about it. U.S. lawmakers and trade organizations recognize the trade gap in the North American wheat market.
The USDA’s Report to Congress on Policy Barriers to U.S. Grain Producers in March 2016 indicates that despite the proximity of U.S. producers to Canadian buyers, the export numbers remain stubbornly low.
For example, roughly 3.2 million tonnes of U.S. wheat is produced within 50 miles of a Canadian elevator. This figure includes roughly 28% of North Dakota’s total wheat output, 11% of Montana’s production, and 8% of Minnesota’s wheat crop.
Digging deeper, U.S. farmers harvest one million tonnes of wheat within 25 miles of Canadian elevators.
What Is Causing the Divide?
Ask U.S. producers and the USDA and the blame will fall on Canadian grain grading standards. Although the North American Free Trade Agreement enables the tariff-free flow of U.S. and Canadian grain across the border, American farmers usually only find the higher price on the U.S. side.
U.S. Wheat Associates (USWA) has called Canadian standard practicing “unfair treatment” and claims that the nation’s treatment of U.S. wheat is in violation of World Trade Organization (WTO) Agreement on Technical Barriers to Trade (TBT) Article 2.1.
“Canada allows tariff-free access to wheat from the United States and certain other foreign sources,” the USWA wrote in a recent report. “However, imported wheat, even wheat of the highest quality, must be segregated from most Canadian wheat. It is automatically given the lowest grade established by regulation and therefore receives the lowest possible price.”
Truthfully, we just know from industry sources that this is not always the case.
But this criticism has consequences. While Canadian imports do weigh on wheat prices along the border, there are concerns that the U.S. might attempt to slap tariffs on agricultural imports from the north. Doing so could very well start a trade war of wheat between the two countries. 
But it will really be one-sided.
Canada just doesn’t need to import much wheat.
In fact, nearly 75% of all Canadian wheat imports already originate from the United States.
Who Is Buying North American Wheat?
In 2015/2016, Canada exported more wheat than the United States, clocking in 22.5 million metric tonnes compared to the 21.5 million shipped by its neighbor to the south.
Canada and the U.S. were the third- and fourth-largest export markets, respectively for the year.
Canada’s largest export markets consist of the United States, Japan, Indonesia, and its other NAFTA partner, Mexico. Bangladesh rounds out the top five. Canada supplanted the U.S. as the Western Hemisphere’s largest wheat export during the 2014/2015 marketing calendar.
The common denominators across the complex are exports to the Japanese and Mexican markets. The U.S. ships far more wheat to Japan and Mexico than Canada does. The U.S. also has found stable demand from China, Nigeria, the Philippines.
As we noted in our exploration of Egyptian wheat demand, the U.S. is largely abandoning Cairo as a hub for wheat transactions and marketing. Though the USWA will cater to specialty producers in the region, the retreat to an office in Morocco is a disturbing sign.
Who Will North American Wheat Traders Target?
The USWA says it will focus its marketing efforts on Latin America and Asia.
But what countries will the U.S. and Canada find as potential customers in the years ahead?
The competition will likely heat up in Mexico, particularly at a time that the U.S. dollar strengthens due to rate hikes. Comparably, Canada is expected to maintain interest rates at current levels and oil prices are expected to stay in a range of $60.00 to $70.00 USD per barrel for an extended period of time.
India presents a unique opportunity for North American wheat exports due to rising populations in the years ahead. There’s expected to be 1.4 Billion people living in India by 2025. This uptick would surpass China as the world’s most populous nation and create significant demand for wheat. However, North American wheat exporters will be at the mercy of India’s lackluster storage capacity.
About 25% of the nation’s production ends up useless due to inadequate storage facilities. 
It also produces 90 million to 100 million tonnes of wheat every year. Thus, if they figure out their storage issue, that will likely support the domestic market before international imports.
Other potential customers include South America, where Argentina has a stronghold. Last year, Argentina exported 11.5 million metric tonnes.  The U.S. exported 1.254 million metric tonnes to Brazil, and another 837,000 MT to Colombia in 2016.
The U.S. will look to bolster its exports to both countries in the years ahead, but a strong U.S. dollar will make it difficult to compete against Argentinean wheat producers who have an advantage due to a weaker currency.
Looking Ahead for North American Wheat
We anticipate that competition between North American wheat exporters will intensify due to the sharp increase in Black Sea shipments. Look for both nations to explore new markets, but for potential customers to use currency fluctuations as a key determinant in penning a deal.
In addition, markets will keep a close eye on the upcoming round of NAFTA negotiations. Barring a dramatic policy change on U.S. exports to Canada, we anticipate that the status quo will continue on Canadian grain standards.