Russian wheat yields up 80% in five years

One of the main challenges in global grain markets today is the fact that there is just too much supply. Russia is now a major contributor to this supply, especially on the wheat side, having experienced an 80% increase in yields over the past five years. The consequence has been much bigger quantities available for export, alongside bigger quantities being used domestically to produce animal proteins.

This was one of the main comments made by US AgResource president Dan Basse at the R&H Hall/Barnett-Hall/Precision Liquids conference last week. These continuously increasing Russian wheat yields have pushed its potential grain export level from about 12m tonnes (Mt) a number of years ago to over 40Mt for the current season.

Markets changing

The structure of global grain markets is changing, Dan stated. The once-dominant US export machine is now much less significant, especially on wheat but also on maize. This is because US wheat is now relatively costly in the competitive export market. And while the US is the biggest global producer of maize, other regions like south America and Ukraine have also become very important as exporters.

“The world has never produced more food,” Dan stated. “We are still producing and consuming more meat and biofuels. And the US will produce more bioethanol and biodiesel in the next five years. But the big question is will global economies continue to be able to drive and support the growing demand for higher-end food,” Dan asked.

World economies are performing relatively well at the moment and there is some badly needed inflation beginning to appear, Dan reported. China has been a significant driver in the additional demand for food and other commodities over the past two decades but Dan suggested that its expansion in food growth can be expected to slow. The average calorific intake in China is now close to that in the developed world and so increases in demand are likely to be lower into the future.

Concern was also expressed about the Chinese economy and the potential for a banking crisis there. But the feeling elsewhere is that this will be managed within the Chinese economy and its impact on living standards and food demand may be low. The fact that China is now becoming an aging population can be taken as an indicator that demand for food is likely to slow.

If one wants to look towards increasing demand for food today then south Asia is where the action is more likely to be, Dan stated. The countries below China and as far west as India still have massive capacity to increase their demand for food as population and living standards increase. Dan stated that this relatively small region of east Asia is currently home to 22% of global population but that this proportion will decrease in time as the populations of south Asia and Africa expand.

Changing production dynamics

One of the drivers of increased global grain output has still been the increasing acreage producing grains. Dan said that this has been increasing since 2006 and the question now is can this continue to increase or could it actually decrease due to economics or some other factor? Basically there is just too much grain being produced and the world needs to decrease production by about 250m ha for a few years to restore supply balance.

Asked if there was the potential to add more acres to the production base, Dan said that there was an estimated 9m ha still available in one region of Brazil which could easily come into maize and soya bean production. This land is still controlled by the state.

That said, global grain stocks may decrease slightly this year, especially for maize. This is partly due to demand but Dan said that the growing demand for maize is affecting the area and production of other minor cereals. As maize grows, it is displacing other grains and Dan said that this was part of the reason why feed barley prices in the Black Sea region had increased considerably in recent times.

One of the main challenges facing the market is that global trade has not grown appreciably in recent years to help consume the surplus output. This is especially the case for wheat as demand for soya beans has grown very considerably, with China still set to be a major importer. Dan indicated that the projected import demand from China is forecast at 100-103Mt of soya beans for the coming season.

While this may well hold true, Dan commented that some new soya bean varieties are about to go into production in China which have far superior yield potential than current varieties. In tests, these have added up to 6 bu/ac (403kg/ha) to yield and that could equate to a lot of tonnes in China.

Talking about the maize or corn market, Dan introduced a new acronym – ABU. No, it’s not “Anyone but United”, its actually Argentina, Brazil and Ukraine. ABU because these three together are affecting the dynamics of maize globally. These three together are likely to export over 77Mt of maize this year, over 52% of the estimated global trade and more than the USA.

Currency issues

Currency is a significant factor in trade and relative competitiveness. But with the dollar losing some of its value in recent times (down 10% this year) Dan wondered if other currencies might be used more in the future – the euro, for example. He stated that in some recent import transactions the Chinese had actually used their own currency for payment.

Generating growth in economies is important to maintain or stimulate demand. Dan said that the velocity of money in the US (the speed at which money is being turned over) has slowed considerably in recent years. That is taken as an indication of consumer activity and indicates that money is being turned over less and less. This is heavily influenced by political confidence and that is low at the moment in the US.

The best place on earth to farm currently has to be Argentina, Dan stated. The combination of low currency valuation plus the ongoing reduction in export tax on soya beans means that farmers there can keep more money in their pockets, as long as the negative impact of more expensive imported inputs can be minimised. So if you are happy to farm in pesos that’s the place to head but remember that they have had many difficult years in the recent past as a consequence of political interference.

Stock levels

Official stock levels are currently very high globally and in some specific countries. But Dan asked if these stock levels are accurate. “Who really knows?” He commented that farmer reaction is possibly the best indication of actual levels. If stores are already full, or part full, more grain must be put on to the market and this is not happening in some countries where stock levels are reported to be high. Stocks cannot continuously be held on farms.

Dan asked specifically about stock levels in countries like Russia, Argentina, China, Brazil and even India – who really knows what’s in there?

Of the total stocks stated, there is also the issue as to how much of it is held in countries which are unlikely to release it onto the international market in times of stronger demand or higher prices. Some of this stock is used to provide strategic reserves within countries.

Low prices drive output

The world has had four to five years of low grain prices and this is supposed to send a signal to producers, through the market, that oversupply is an issue. However, farmers continue to farm regardless of price prospects. as that is what tradition dictates. But it’s not just about the acres planted – when net farm incomes get strained the main reaction is to push for more yield to help offset the profitability challenge. However, unless demand increases this can be a further negative factor in the market supply situation.

That said, there can be little doubt but that Russia is currently the single-biggest factor influencing markets. Their 80% increase in wheat yield since 2012 now means that this country accounts for 21% of the global wheat trade, and rising. Indeed, Dan said that the Black Sea region will shortly account for 27-28% of global wheat exports. With current trends, the main thing that will prevent or slow its importance is the limited port export capacity which is currently maxed out at just over 42Mt.

The overall increase in Russian wheat output (and Ukraine) is put down mainly to investment on the old collective farms. Improved production technology is being implemented but most agree that there is still some way to go before these increases max out.

Varieties alone made a big difference as some of the previously cultivated types were bred back in the 1950s. Modern varieties coupled with improved fertilisation and plant protection technologies are adding incrementally to yield.

“There’s another important factor,” Dan commented. While varieties have been a significant factor in yield improvement in Russia and Ukraine – they also appear to be having an impact in the US. “We have just had what most believed to be a less than satisfactory growing season in the US Midwest and yet crops are coming in with higher than expected yield levels.

“Have the plant breeders successfully bred a significant level of climate tolerance into modern maize and soya bean varieties?” he asked. If they have, then poor yield years may be much less frequent and traditionally these were the main market-balancing mechanism. It also makes one fearful of what a very suitable growing season could produce.

Price levels

Traditionally, price levels for commodities have tended to run in plateaus. Runs of eight to 12 years have often shown similar price levels and then something happens and prices can rest at a new level for another period. At current price levels, Dan suggested that there is now very little downside in the market and that price levels are more likely to go up than down into the future.

That said, he sees $3-$5 per bushel (approximately $120-$200/t or €100-€170/t) as the likely price range for maize in the longer term. But price is production-dependent and production is still weather-dependent. With the Atlantic being at its warmest temperature ever, weather scares will remain a feature of climate into the near future at least. But such conditions can still give rise to significant drought risk in the larger continental land masses in particular.

The black swan

Market trends always take a turn; some are predictable, many are not. But in terms of changes that are occurring currently, Dan warned that the trend towards electrification of vehicles could have a major impact on the demand for fossil fuels and, in particular, biofuel which would obviously impact on overall grain demand levels. Many countries have set relatively near deadlines for the ending of fossil fuel cars in favour of electrically propelled vehicles.

Another possible threat is the move to synthetic or laboratory-grown meats. While this is currently too expensive to be attractive to most consumers (approximately $15/kg), Dan believes that technology will improve to bring this cost back down towards $5/kg in the relatively near future. This price level would make it far more feasible and it is possible that the product may be attractive to millennials who might opt for this in preference to real meat on the basis that nothing had to be killed to produce it. Either way it would reduce demand for grain to produce animals.

However, if production ever slows or stalls, the current pace of growth in demand would quickly grow to consume the current biofuel consumption level. And while such changes are coming down the track, one assumes that there will be a few years of lead-in to any such dramatic market impacts. But it is important for grain producers to watch this space.