One of the most important marketing considerations as we market Ontario’s potentially record large 2023 wheat crop is that international export markets are going to become a key driver of domestic price.
With the expectation that this province will harvest more than 3-million tonnes of winter wheat, our capacity to load ships and trains with wheat and send them to external markets is going to be a key establisher of price. So, as wheat producers it’s key to develop an understanding of the factors driving world markets.
The last time we saw a significant rally in Chicago wheat futures was in late October and the very earliest days of November. At that point, Ukraine was struggling to export grain from their Black Sea ports due to Russian naval activity and public statements by Russian leadership that they did not intend to allow Ukraine to continue to export grain. Part of a United Nations brokered deal to resolve this problem and get Ukrainian grain flowing again was to allow one Russian state-owned bank, Rossellhozbank, back into the SWIFT international currency messaging network.
Locking the Russian banks out of SWIFT was an economic sanction levied on the Russians by the European Union, the United States, the United Kingdom, and Canada back at the start of the Russian invasion of Ukraine, and was intended to impede their capacity to exchange funds with banks in other parts of the world, which made it difficult for Russian exporters to receive payments or exchange funds. Allowing a Russian bank back into the SWIFT network is a significant incentive for allowing Ukraine to continue to export agricultural commodities.
There are two reasons why it’s noteworthy that Rossellhozbank is back in the SWIFT network. The first is because it means that the Russians have something to lose if they blockade Black Sea grain exports, and perhaps more importantly, it demonstrates that at least at some level there are international negotiations taking place with Russia with regards to Ukraine.
Between late October, (when Russia was threatening to stop Ukrainian grain exports), and early December, Chicago wheat futures dropped nearly U.S. $2 per bushel between a high of $9.20 on November 1, (the day before the SWIFT arrangement was announced), and a low of $7.29 on December 6. Since that date, wheat prices have recovered partially due to a combination of factors including funds short covering, a technical reversal, and ice on the US winter wheat crop. However, in the midst of all of these other reasons for wheat prices to be bouncing back is the fact that Russia seems to be determined to knock out Ukraine’s hydro grid. It’s tough to load and ship grain without electricity. They are no longer using the Russian navy to intimidate commercial grain shipping, (which would contravene their SWIFT banking deal), but they’ve clearly developed an alternative strategy to impede Ukrainian grain exports.
The quality of winter wheat which we grow in the Great Lakes basin is quite a bit different than the crop which is produced in the Black Sea, and while it’s entirely possible that none of Ontario’s 2023 wheat crop will flow to markets typically supplied by Ukraine, their situation still has an enormous capacity to influence our price. Take for example, that U.S. $2 per bushel swing in Chicago wheat futures prices as the UN negotiated a deal with Russia to enable Ukrainian exports. At no point in that October to December shipping window was any export terminal in the lakes loading wheat to deliver to a Black Sea customer. But that U.S. $2 per bushel price swing easily impacted Ontario winter wheat gross income per acre by $200. Not because our wheat movement was impacted, but rather because the futures market was reacting to a global market situation, and our prices are built upon Chicago futures market values.
What we need to be keenly focused on as we look for opportunities to price wheat is the potential for more anxiety in the Black Sea region. Now that the Russians have something to lose if they overtly block Ukrainian grain exports, it seems unlikely that they will be so direct about stopping it, and equally unlikely that CME wheat futures will rally back up to $9.20. But if they did try to stop exports we have a pretty good historical example of where price should go.
If you are looking to set some pricing targets, something near the mid-point between the November 1 high and the December 6 low is likely achievable on some political headlines from eastern Europe.
As grain producers we are hard wired to pay attention to weather and crop conditions, but this wheat market is going to be all about politics. At least until spring.
Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.