Uncertainty about where the world will get its wheat, as the Ukraine war persists, opens the door for Canada to take on a larger role in ensuring global food security.
The Ukraine war has raised concerns on future export operations from the European region and increased expectations for Canadian exports in marketing year 2022-23 (August-July). This comes after several years of Canada's share of the global export market shrinking amid increased exports from Black Sea producers.
Canada accounts for only 4%-4.5% of global wheat production, but in 2021 accounted for 7.7% of total global exports. Estimates from the US Department of Agriculture's June WASDE report for the next marketing year see that export share jump to 12% of global volume.
It is an understatement to say that Russia has had a big impact on the global wheat market this year – and this looks unlikely to change soon.
Global wheat prices shot higher following the Russian invasion of Ukraine, with the Platts FOB Vancouver Canadian Western Red Spring wheat price gaining over $80/mt to $484.47/mt on March 7 and futures still holding above average prices and seeing increased volatility as a result.
Platts, part of S&P Global Commodity Insights, launched FOB Vancouver CWRS wheat assessments in November 2021 to give insight into the West Coast Canadian wheat market.
While values have begun to come down now that new crop plantings have seen progress, values remain elevated compared to historical trends.
Russian wheat production is also poised to increase nearly 10 million mt from the previous year to an estimated 85 million mt, with potentially 43 million mt headed for exports. If those targets are hit, Russian wheat would account for 21% of the global export market.
Can Canadian wheat fill the gap?
CWRS wheat, the largest wheat class in Canada, is mainly produced throughout Alberta, Saskatchewan and Manitoba. Unlike wheat production in Eastern Canada, which is mostly used domestically or shipped into the United States, CWRS is focused on exports to Southeast Asia with some of the largest buyers being Indonesia, Japan and China.
This wheat is valued for its excellent milling and baking qualities, while also holding good protein levels through the milling process. CWRS is recognized as a quality ingredient for a wide variety of bread and noodle production.
CWRS accounts for around 70% of the wheat produced in western Canada, and close to 75% of that production annually feeds into the global export market.
Sizable swings in cash wheat prices this year have made it challenging for producers to market grain. Low volumes of surplus wheat have kept some sellers reluctant to offload volume during downturns in futures, while high prices have limited demand.
The Canadian wheat market is also poised for significant year-on-year growth in production following drought conditions during the 2021-22 marketing year, which sent output to its lowest in more than 14 years. A lower supply of available old crop volume has cut export sales for the 2021-22 marketing year down 43% through June 12 when compared to the same year-ago period, according to the US Department of Agriculture's June World Agricultural Supply and Demand Estimates report.
Canadian wheat production in the 2022-23 marketing year was an estimated 33 million mt, compared to 21.65 million mt in 2021-22. The June WASDE report also allocated 8.5 million mt of the increased annual Canadian wheat production to flow into the export market.
While farmers and agricultural traders are used to following the weather closely, the fresh memory of a challenging growing season during the previous year has added intensity to their focus for the current crop. Early dryness followed by a period of heavy rains have begun to balance out in recent weeks and high temperatures have given way to a milder forecast now that plantings have been mostly completed. These improved conditions for the crop have helped calm early worries about production, but weather forecasts are never considered firm guarantees.
Uncertainty over production and volatile futures prices have slowed the flow of old crop inventories into the export market, with farmers holding out for potential returns to high prices on turns in the weather or further erosion of supply out of the Black Sea market. However, improving weather conditions have begun to ease production concerns and help bring more bushels out of storage.
Newly-launched futures give West Coast market a tool
Against this backdrop of geopolitical risk amid a war in the key wheat-producing nation of Ukraine and volatility in the domestic market, traders looking at the Canadian wheat market or just hoping to better manage risk in the global wheat market have a new tool available to help limit exposures to moves in the cash market.
On June 13 the CME Group launched a CWRS futures contract on the Chicago Board of Trade exchange. These Canadian Wheat futures contracts settle on the Platts FOB Vancouver price assessments by S&P Global.
International buyers have looked for ways to hedge risk associated with price swings in milling wheat abroad while domestic Canadian producers face exposure to using inland contracts despite shipping most of their product to the Canadian West Coast. The futures also join a suite of other tools in the global wheat market that let buyers and sellers manage risk.
The FOB Vancouver CWRS market has historically traded relative to the Hard Red Spring Wheat futures on the Minneapolis Grain Exchange. Strong liquidity in the MGEX wheat futures have made the contract a solid pricing basis for many inland wheat markets that correlate well with the futures.
For market participants sending wheat to Vancouver or buying exports from Canada's West Coast, though, the spread between this physical wheat market and MGEX wheat futures has been volatile, what can be referred to as "basis risk."
Since S&P Global launched the Platts CWRS assessment, the spread between the 30-45 days forward physical assessment and the MGEX futures has ranged from a Feb. 3 high of 154 cents/bushel to a May 20-23 low of 59 cents/bu. That 95-cent range in just a few months represents basis risk between CWRS wheat in Vancouver and inland futures. Put another way, the spread between the futures and the physical market represented 14.63% and 4.4% of the outright value of CWRS on those dates, respectively.
If a market participant were to hedge using MGEX futures on Feb. 3, the futures would only account for around 85.4% of the price of FOB Vancouver CWRS wheat.
Because the newly-launched CME futures use the Platts assessment of the physical market to settle, the futures cover the full value of the FOB Vancouver wheat market.
Without a doubt, stakeholders watching and participating in the global wheat market are up against severe risks in the upcoming year as the Ukraine war and weather-related challenges continue to roil values. The FOB Vancouver futures join Black Sea and Australia wheat futures in giving market participants tools when looking at the key wheat markets around the world.