Nontraditional exporters have the potential to diversify wheat supply and permanently reduce the chance of big weather rallies, says the head of the Canadian Wheat Board’s market analysis.
But this year’s flood of exports from countries including Ukraine and Russia may dry up if big grain companies find they don’t need their grain.
“We don’t know about their potential in the long term,” said the CWB’s Brian White.
“It could just be a flash in the pan.”
White said nontraditional exports have been directed by multinational companies and are not the product of a widespread development of agriculture in those countries.
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Some multinationals that need wheat to fill their supply contracts have reached into countries surrounding the Black Sea to get it.
White said the companies contract with farmers to produce the grain, contract with a local terminal to collect it, contract with a railway company to move it to port, and contract with the port to load it onto ships.
This system has produced big grain flow from the areas immediately surrounding a few inland terminals, but has not led to a widespread creation of export grain zones. It creates a “hard currency zone” where farmers can get their grain to the terminal and receive dependable currencies like the American dollar.
But it leaves the vast majority of acres in areas that are not able to ship the grain out and where farmers are paid in less dependable currencies, such as the Russian ruble.
“We’re talking about relatively small areas,” said White. “This is no widespread phenomenon.”
Whether these multinational grain exporters will continue to aggressively source grain in these areas may depend on whether traditional exporters, such as Canada, the United States, Australia, Argentina and the European Union, begin producing normal sized crops again.
“The multinational isn’t really interested in getting out anything beyond what they need,” said White.
“Their interest is not in becoming the saviour of Russian agriculture. Their interest is in getting enough supply to service their contracts.”
White said wheat from eastern Europe and the former Soviet Union has been attractive because farmers are willing to accept low prices. Their only other option is the domestic market, which is not attractive.
The difference between what the company pays and what the grain sells for on the world market is large enough to allow for the problems of using new suppliers. Even if farmers renege on contracts, the companies can still sell the grain at a lower price than traditional suppliers’ grain, he said.
Early in this crop year, nontraditional suppliers’ grain was being offered for about $100 US per tonne less than wheat from traditional sources. That differential has tightened to about $40 US, but that is only because top-end prices for traditional exporters have fallen.
Regardless of whether nontraditional exporters continue to play a large role, their demonstrated ability this year to push wheat into the world market lessens the likelihood of weather causing price rallies.
Adding three or four potential exporters to the usual roster of five or six reduces the chance that bad weather will seriously reduce world supply.
“You’re definitely diversifying the geographic supply,” said White.
