Wheat Prices

Wheat producers
	Country	2014/2015
1.	European Union	155,685	See Data
2.	China	126,000	See Data
3.	India	95,850	See Data
4.	Russia	59,000	See Data
5.	United States	55,129	See Data
6.	Canada	29,300	See Data
7.	Pakistan	25,000	See Data
8.	Ukraine	24,750	See Data
9.	Australia	24,000	See Data
10.	Turkey	15,250	See Data

Wheat is the second largest crop in the world in terms of volume; 725 mmt of the grain was produced worldwide in 2014/15. The European Union is the largest producer of the grain with an output of 156 mmt in 2014/15, followed by China with an output of 126 mmt. While wheat isn’t the largest crop in terms of production, it is the product that is traded the most internationally with 151 mmt expected to be exported in 2014/15. Due to this high volume of international trading, traders monitor wheat prices in the origins closely. The most important report that traders keep an eye out for is the USDA report on planting and expected production. 

The biggest exporters of wheat are the European Union, the United States, Canada, and Russia with the largest importers of wheat being Egypt, Indonesia and Algeria. Wheat demand from Egypt is largely politically driven because the government heavily subsidizes bread for the poor. By keeping wheat prices low the Egyptian government tries to gain political leverage while feeding their hungry. Egypt has set the goal to become less dependent on wheat imports in the near future because high wheat prices can weigh heavily on the national budget.

Wheat is mostly produced for human consumption, although between 30-40% of total wheat output goes directly into animal feed. Wheat prices correlate to the prices of corn, barley, and sorghum as they are substitutes in animal feed compound. Beside food and feed, a small percentage of worldwide wheat production will go into the production of wheat ethanol. The by-product of wheat ethanol, wheat ddgs, is a good source of animal feed protein and competes with rapemeal, sunmeal and soymeal. Wheat prices of ddgs tend to be lower than other feed ingredients since it is mainly composed of a by-product.

Soft red winter wheat contract traded on the Chicago Board of Trade is the most liquid futures contract world-wide. It is the most important indicator of wheat prices, although there are several exchanges for different varieties of wheat. The equivalent of 15 million tons is traded every day, which is 10 times more than the most actively traded futures contract in Europe. The quantities traded on the futures markets are much higher than on the physical market. For the best physical market indicators, traders tend to look at the predictions of the USDA.

Explanation of Wheat Varieties and Prices

Wheat is a generic term referring to different varieties of the grain. Hard wheat has the characteristic of having higher protein and gluten content. Hard wheat is used most often in hard baked goods, such as bread. Soft wheat has the characteristic of having higher starch content and is more commonly used in soft baked goods, like pastries. Red and white indicates that those particular wheat varieties produce flour with different colors. Spring varieties are planted in the spring and harvested before summer droughts set in. However, in hot and dry climates, spring varieties can also be planted in the fall. Winter varieties are planted in fall, where they slightly germinate before winter sets in. Plants will remain dormant over the winter but the early start allows them to produce superior yields the following summer. Hard wheat prices are generally higher than soft wheat prices due to their higher protein content.

The most common varieties of wheat are:

1. Hard red winter
2. Hard red spring
3. Soft red winter
4. Durum (hard)
5. Hard white
6. Soft white wheat

Because the different wheat varieties are used for different purposes, wheat prices can often be difficult to compare. In the US there are three different exchanges for wheat price discovery, which are located in three different states: Kansas, Minneapolis, Illinois. As in the US, there are three exchanges in Europe, which occur in three different countries: France, UK, and Hungary. In Australia there is only one exchange which hosts the different wheat varieties.

Wheat prices in Europe.

The European Union is the largest producer of wheat in the world with the largest producers within the EU being France (aprox.. 40mmt) and Germany (aprox. 25mmt). Benchmark ports for wheat prices in France are Rouen, Bordeaux and La Pallice. Rouen is the port located the closest to the main growing areas but is not currently capable of handling panama vessels. As of now, Bordeaux and La Pallice have the ability to handle greater quantities. Wheat prices FOB France are important for traders in Europe, as well as wheat prices FOB Baltic and feed wheat prices FOB UK.

Like with other commodities, wheat farmers in Europe have smaller acreages than their counterparts in the rest of the world. The wheat industry in Europe exists because of the EU subsidies to the farmers. Under any other circumstances European wheat prices would have been too high to compete internationally.

In Europe there are two futures contracts for wheat prices, the first being the Matif Milling Wheat Contract which is traded in euro’s per metric ton. The second contract is the Liffe Feed Wheat Contract, which is traded in pound sterling per metric ton. The Matif contract is used as wheat prices benchmark for human consumption wheat, while the Liffe contract serves as a benchmark for wheat prices animal feed consumption. These contracts are mainly used to hedge European wheat price volatility; internationally the CBOT contract is far more liquid than any of these contracts.

 

Wheat prices in Asia

China produces about 18% of worldwide wheat, or 122 mmt in the 2013/2014 year. Wheat is one of the main staples and is about 40% of the total grain consumption in the country. 60% of all Chinese consume a wheat product daily. The largest part of the wheat is produced in the eastern part of the country in the provinces of Henan and Shandong.

Bad quality, variability in production as well as high domestic demand results in China exporting only a small portion of wheat to neighboring Asian countries. On the other hand, however, the country is increasing its presence on the import market. Most of the wheat that is currently being imported comes from Australia, Canada, and the US due to the favorable shipping times.

About 10%, 12.5mmt, of China’s wheat production is used exclusively for animal feed. As the living standards in the country increase along with the increase in demand for meat, this figure is rising quickly.

Another significant producer of wheat in the region is India, which is the second largest wheat producing country in the world next to China. Apart from being the second largest producer, India is also the second largest consumer of wheat in the world. A country staple such as Nan, a type of flat bread, is consumed with almost every meal and plays a large part in the high level of wheat consumption. Though wheat is a commonly consumed, it comes second to rice, the most consumed grain in the country. Despite the high demand for wheat within the country itself, since 2012 India exports significant amounts of wheat, mainly to the Middle East.

India plants almost exclusively winter wheat with the wheat growing areas located in the northern regions of the country. The state of Uttar Pradesh produces 35% of all wheat in India and Punjab produces 22%. The local futures exchange of India the NCDEX has a contract which gives direction to wheat prices in the country. The Indian government has set systems in place to buy wheat from local farmers at a fixed price every year to protect the farmers from distress sales. Even with regulations, the government delivers export subsidies to the farmers. The grain the government purchase is normally sold as food to the poor at reduced prices. Consequently wheat prices in the country remain supported even though the country carries over significant stocks. Estimates of stocks are made on a regular basis by institutions such as the USDA and these can have a large influence on where wheat prices go.

A note on wheat prices in the Black Sea

Russia is in the top 5 of biggest Wheat producers in the world. Wheat in Russia is produced in an area stretching all the way from Kazakhstan to the Black Sea. The country is the third largest exporter of the product in the world. Most of the grain is transported by rail to the ports located on the Black sea, most notably Novorossiysk, with a smaller volume transported to the Baltic. The largest importer of Russian grain is Egypt. Due to recent developments in Russia, the government has imposed export restrictions to ensure food security. Most recently food prices have gone up significantly as a result of the falling Ruble via other currencies. Consumers have begun stockpiling wheat since they expect the Agriculture Ministry will increase the wheat prices at which it buys wheat for state stocks on the domestic market.

Another important producer of wheat is Ukraine. The country produces around 25 mmt per year and exports a little less than half of that, mainly through ports in the Black Sea. As in Russia, Ukraine is feeling the pressure from their falling currency. While wheat exports are in dollars, domestic sales will be paid in the local currency, which decreased by its value by half. Important input costs, such as fuel and fertilizer, still have to be imported and as a result has increased the costs for some farmers by 50%. Furthermore, the crisis has also hit the banks, which in turn has made lending to the local farmers much more difficult.

The last Former Soviet Union country that plays a role in the world of grain trading is the landlocked country of Kazakhstan. The country is the largest wheat producer in Central Asia and exports most of its crops by rail to the popular Black Sea ports. The country is very dependent on the ports of Russia and Ukraine at the moment.

In order to become less dependent on the ports in the west, and because of increased demand from the east, the country has been increasing their exports to China and Iran by rail as well as through the port of Aktau, which lies in the Caspian sea. In the marketing year 2013/2014 exports to Iran of wheat and barley was just short of 800.000 mt, an astounding 100% increase compared to the previous year, and 170.000 mt to China, an extreme 800% increase.

 

A note on Wheat prices in Australia

In 2013/2014 Australia produced about 27mmt of wheat per year and exported 18.5mmt, or 70%, of that wheat. Australia’s main wheat production is in the south-western and eastern parts of Australia. Kwinana and Port Kembla are conveniently located near the main growing areas as well as boast the fastest loading ports in the country, with an impressive 5000 tons per hour. The high demand and export wheat prices in Australia are reliant on Asia. Most exports from Australia go to China and Indonesia because Australia has a significant competitive shipping advantage in comparison to other exporting countries such as Canada and the US. Shipping product from the Australian west coast to Indonesia takes a little over 6 days compared to 22 days for the closest competing nation, Ukraine.

 

Wheat price discovery is done on the ASX Grain futures exchange. There are two wheat contracts, one with delivery Western Australia and one with delivery New South Wales. There are several different contracts for wheat prices since there are many different varieties of wheat in Australia and few of the varieties grown in the country are specific for Australia.

Wheat prices in North America:

The United States is the third largest producer of Wheat in the world after China and India. The country mainly produces soft red spring wheat and hard red winter wheat. The United States is one of the biggest exporters of the grain mainly from the Gulf area and the Pacific North West, while the biggest importers of the product are Japan and Mexico. The American wheat belt is located a bit more to the south than the Corn and Soybean belt so the ports in the South are more strategically located. Kansas and North Dakota are the country’s biggest wheat producing states. Winter wheat is mainly produced around Kansas while spring wheat is mainly produced in the northern part of the US. The map on this website, that was produced by the USDA is a great overview of te main wheat growing areas in the US.

There are three different futures exchanges in the US that are important as an indication of wheat prices. The most important futures contract in the US and in the world is the Soft Red Winter wheat contract traded on the Chicago CBOT. The second most important contract in the US is the Hard Red Winter wheat contract on the Kansas City Board of Trade. The third, and final contract, is the Hard Red Spring wheat contract on the Minneapolis Grain exchange. These exchanges are tracked by traders to see the difference in prices in different locations. Also the USDA produces numbers on local supply and demand in North America.

Based on the different characteristics of the wheat, along with different growing areas, wheat prices are discovered in different locations. For this reason wheat price discovery is different than for corn or soybeans. Different varieties, protein levels, growing periods and locations, which are more diverse than most other commodities, make it much more difficult to gain a solid feeling for wheat prices.

Another major producer of wheat on the North American continent is Canada. The country exports about two thirds of its wheat production mainly to Mexico, Japan, and the US. Most exports en route to Asia go through the port of Vancouver with another important port being Thunderbay Ontario. Wheat price discovery for the country is done partly through the Alberta Canola Board by quoting prices in the interior of Canada. On the ICE Winnipeg exchange there is a wheat contract on which local farmers can hedge their positions.