Key Takeaways
- A modest rebound in U.S. wheat production is improving profitability for grain elevators.
- A major risk to elevators is a sharp rally in wheat prices, mainly due to tight stocks among major exporters.
- The cost of storing grains remains high due to rising interest rates, affecting wider carriers’ profitability.
- Soft red winter wheat harvest rose 31% YoY, benefiting elevators with wide carries in the futures market.
- Global wheat supplies face challenges, including droughts and geopolitical tensions, affecting U.S. exports.
After two years of poor production, U.S. wheat supplies show signs of recovery, positively impacting the profitability outlook for wheat-grade elevators. According to a new report from CoBank’s Knowledge Exchange, the major risk for elevators in the upcoming year is a sharp rally in wheat prices due to historically tight stocks among major exporters.
Risks and Volatility in Wheat Prices
Tanner Ehmke, grains and oilseeds economist for CoBank warns that the influx of cheap Russian wheat may have created a false sense of security in the global wheat market. “The greatest margin risk to storing wheat is the shrinking world wheat crop outside of Russia and China, which leaves the market vulnerable to supply shocks and extreme volatility in wheat prices,” said Ehmke.
High Storage Costs
The sharp rise in interest rates has led to historically high costs for storing grains, including wheat. This challenges elevators to profit on wider carries, especially for hard wheats. Elevators seek opportunities to benefit from a rising basis on company-owned grain throughout the marketing year.
U.S. Wheat Harvest Overview
The U.S. has seen a substantial increase in soft red winter wheat yields, particularly in the Midwest, where the largest crop produced in nine years. Based on USDA estimates, this year’s soft red winter wheat harvest rose by 31% year-over-year. However, hard red winter wheat and hard red spring wheat faced challenges such as ongoing droughts and late planting, affecting their yields.
Global Wheat Supply Challenges
Cheap Russian wheat and a strong U.S. dollar continue to be headwinds for U.S. wheat exports. Additionally, geopolitical tensions, such as the Russia-Ukraine war, and environmental factors like droughts in Argentina, Canada, and Australia, have substantially reduced global wheat supply. China’s wet weather during harvest and India’s ban on white rice exports influence global wheat demand.
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Photo by Raphael Rychetsky on Unsplash
