Who Will Pick Up the Slack?
We recently wrote about the market disruption of the global sunflower industry tied to the ongoing geopolitical unrest related to the Russian incursion into Ukraine. During our research, we could not help but notice how the region was home to a significant amount of wheat production too. Of course, we’d seen the media reports before that, but it was particularly interesting to us how a significant agricultural region unfortunately straddled the war torn border and had been subsequently thrown into disarray. As a result, this week we’ll turn our attention to the wheat market and what disruption to a major wheat production area might look like elsewhere in the world and in the U.S. specifically.
Wheat has long been a staple crop for humans worldwide. In fact, it is the most-consumed commodity by humans according to the Organisation for Economic Co-operation and Development (OECD). The OECD, in tandem with the Food and Agriculture Organization of the United Nations (FAO), annually publishes the Agricultural Outlook. The Ag Outlook, as it is more commonly known, is essentially a 10-year forecast on the disposition of global crop production, imports, exports, consumption channels (food vs. feed vs. biofuel, for example), and several other metrics for the world’s most important crops. It is a great resource, but since the information is estimated, it is wise to apply some discernment to its interpretation.
“The Agricultural Outlook is a collaborative effort of the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) of the United Nations. It brings together the commodity, policy and country expertise of both organisations and input from collaborating member countries to provide an annual assessment of prospects for the coming decade of national, regional and global agricultural commodity markets.”https://www.agri-outlook.org/about/
The most recent Ag Outlook, published in July 2021, spans the 10-year period of 2021-2030. For the purposes of this post, we will focus our attention on 2020 data since many sources of newer 2021 data are not yet available. It will also give us the ability to cross reference some of the data from other sources, including USDA and the FAO.
Although corn–identified as “maize” in OECD reports–leads the world in overall production at 1.7 billion Metric tons (tonnes), much of it is diverted to feed and biofuels. OECD estimates that wheat, on the other hand, had the fourth highest production at 767 million tonnes but the highest worldwide consumption at 755 million tonnes for a much more balanced production-to-consumption ratio. We went on to compare the 2020 OECD estimated production numbers to the reported FAO numbers and found only a six million tonnes difference between them. The OECD also estimated that the human consumption per capita for wheat in 2020 to be nearly 68 kilograms (kg), or 149 lbs. This exceeds rice (54.8 kg/121 lbs) and is far greater than corn (19.1 kg/42 lbs) and soybeans (2.4 kg/5.4 lbs). For what it’s worth, if you live in the United States and think 149 lbs of wheat feels high, you would be right since the Economic Research Service (ERS) at USDA reported a U.S. per capita consumption level of wheat to be 131 lbs in 2019. However, ERS also notes that wheat is particularly popular “in many low- and middle-income countries,” which is a key driver for a higher per capita consumption around the world. Regardless, globally it is a very important crop.
To truly understand the scope of the potential disruption, we must first obtain a better understanding of how much wheat is traded on the global market. For 2020, OECD estimated that number to be 188 million tonnes, or about one-quarter of all wheat produced in the world. But how much of that comes from Russia and Ukraine? USDA’s Foreign Agricultural Service (FAS) reported in an April 2022 bulletin that Ukraine produced 33 million metric tons of wheat in the 2021/22 marketing year. According to the same FAS report, that volume represents 4.3 percent of global production. However, it exported 19 million metric tons of the wheat that it produced, which accounted for a hefty nine percent of global wheat exports. Meanwhile, FAOSTAT, the FAO’s statistical service, reports that Russia produced nearly 86 million tonnes over the same period, making it the third-largest producer of wheat in the world. However, again consulting OECD data, Russia is the top wheat exporting country in the world by a wide margin at 38 million tonnes, or 20 percent of the total volume of global wheat exports. Together, Russia and Ukraine accounted for nearly 30 percent of all wheat exports in 2020, or 57 million tonnes.
These numbers are similar to what’s been estimated by experts like Dr. Aaron Smith, an agricultural economist at the University of California, Davis. In one of his recent very informative blog posts, he pegs the Russian contribution to global wheat exports at 19 percent, making it the top wheat exporter in the world while noting that Ukraine is indeed responsible for nine percent of the world’s wheat exports. Dr. Smith goes on to illustrate with data how the war, while tragic on its own merits, will mercifully not plunge the world into a food crisis.
Russia produces 11% of the world's wheat and Ukraine produces 3%. These countries make up a larger proportion of global exports. Russia accounts for 19% of the global wheat export market and Ukraine 9%.
Avoiding a global food crisis is great if that is in fact the outcome, but what will happen within the wheat market as demand shifts to other suppliers and crops? Fortunately, for U.S. wheat growers, their product will be in higher demand. In fact, the price of wheat has gone up 61 percent in the past year already. Shortly after Russia’s invasion of Ukraine, wheat futures skyrocketed to more than $13/bushel and are still hovering near $12/bushel.
In 2020, USDA’s National Agricultural Statistics Service (NASS) reported that U.S. farmers produced 1.828 billion bushels of wheat, or about 54.8 million tons (49.8 million tonnes). Of that total, the USDA Foreign Agricultural Service (FAS) reported through its Global Agricultural Trade (GAT) System that 26.1 million tonnes of wheat was exported from the U.S. the same year, which represents about 52 percent of all wheat grown in the U.S. That is good enough to make the United States the number two wheat exporter in the world behind Russia.
Canada is very similar to the United States in terms of both wheat production and exports. In fact, Canada is directly behind the U.S. in both categories according to the OECD and FAO. In 2020, it produced 35 million tonnes of wheat and exported 25 million tonnes for a higher exported share of its overall production as compared to the U.S.
During our conversations at trade shows with farmers from around the country, we’ve heard several mention that they wish they’d devoted more ground to wheat production. Of course hindsight is 20/20, and there are crop rotations to take into account, but their point is well taken. Although the world may weather a food crisis, there will definitely be and already is a disruption as markets adjust to a gaping void in the wheat export market. Already some African countries are shifting to other sources of nutrition because the price of wheat has gotten prohibitively high. Is the global market capable of picking up the slack specifically for wheat?
With the rise in popularity and profitability of other crops like corn and soybeans, it shouldn’t be surprising that the share of wheat acres in the U.S. has declined over time. However, we did not expect to see that the number of U.S. wheat acres planted in 2020 was the very lowest ever recorded by NASS: 44.5 million. Conversely, the highest was 88.3 million acres recorded in 1981. A similar story is being told in Canada where 2020 harvested wheat acres were about 25 million, well below the 35 million acres recorded in 1991. Looking at historical yield data, it is no surprise why. Since NASS began collecting yield data for all three commodities in 1924, yields for corn have skyrocketed. Yields for soybeans and wheat have also increased, but not like corn.
Lest we get too far off track, we will just summarize the yield disparities by saying that there are several different drivers of that which can mostly, if not entirely, be traced back to the relative genetic simplicity of corn. But the point is that it is tied to the overall planting choices made by farmers who can quite simply be more profitable with corn and the consumption channels that have grown with it as yields have climbed over time.
In any case, farmers could not just throw on the brakes and switch from corn to wheat. Based on modern wheat yields and the export vacuum left by Russia and Ukraine, U.S. farmers would basically need to double their wheat acres and export all of the additional production to fill it. There are far too many challenges associated with that and the infrastructure pressures would simply be too great. Plus there would be domino effects associated with the removal of corn and soybeans from the market. However, it will be an interesting scenario to watch over the coming years as the market seeks to resettle itself in the face of geopolitical challenges.
We all knew that a shortage of wheat from the Black Sea region would lead to rising prices, but it is nice to see some numbers to back it up.