MI Prospects

Daniel Rooney

Daniel Rooney, Analyst, AHDB Market Intelligence
Daniel.Rooney@ahdb.org.uk, 02476 478840

ADS Felicity Rusk Trainee Analyst 024 7647 8818

Felicity Rusk, Analyst, AHDB Market Intelligence
Felicity.Rusk@ahdb.org.uk, 02476 478818

Amandeep Purewal.jpg

Dr Amandeep Kaur Purewal, Senior Analyst, AHDB Market Intelligence
Amandeep.kaur.purewal@ahdb.org.uk, 02476 478954

Global wheat: The risks behind the records

The unprecedented run of surplus wheat production globally in recent years has helped mask the threats to output, which have been simmering beneath the surface. Is the bubble about to burst?

Introduction

Looking at the evolution of global wheat production since 1960 (Figure 1), we see that output has increased by 225%, to reach a projected 758Mt in 2017/18. Despite this increase, the global area harvested has remained fairly consistent, with a 5% decline since 1980s. Meanwhile, average global yields have more than doubled since 1960s, and have been the main driver behind growing production. The reliance on yield heightens the risk for output, as it is in part determined by uncontrollable variables, such as the weather and pests.

In the first article of this series, we focus on the changing dynamics of global wheat supplies and how, despite the bearish headlines, there could be trouble brewing beneath the surface. 

Figure 1 World Wheat Production

Has recent favourable weather masked the risk?

Due to a lack of widespread adverse weather conditions over the past four years, there has been an unprecedented run of surplus global wheat production. This has masked the underlying risk from a declining harvested area. World record wheat production has been achieved consecutively in the past four crop seasons, with another record breaking year projected for 2017/18. How would global wheat production have looked if the last four seasons if the recent exceptional yields were not achieved?

Retrospectively, we can envisage the possible global wheat production if the Olympic five year average yield prior to the recent run of good weather was achieved and maintained (i.e. pre-2013/14). Olympic averages remove high and low values in a given range and average all remaining values. Figure 2 plots actual global wheat production over the past decade, as well as how much would theoretically have been produced if the average yield from 2013/14 onwards was based on the five year Olympic average yield (from 2008/09 to 2012/13).

Figure 2 Global Wheat Production

In this scenario, the gross production between 2013/14 and 2017/18 would be 177Mt lower than current estimates. Given the steady annual growth in global wheat consumption levels, it is likely that there could have been much less of a surplus, and potentially even a deficit in these years. As a result, stock levels could have been lower than current levels, should average yields have been achieved. 

Mixed area changes for top exporters

Since the turn of the decade (2010), the top six wheat exporters have been, in alphabetical order, Australia, Canada, the EU, Russia, Ukraine and the United States. From 2010/11 to 2017/18 these countries are projected to account for 86% of all wheat exports. Russia is projected to be the largest wheat exporter in 2017/18 with 36Mt, overtaking the US and the EU.

The evolution of wheat production in the top exporter nations largely mirrors the global picture, with increasing yields but a decline of area expansion. However, if we break this down by established and upcoming exporters, we see some different patterns emerging (Figure 3).

Figure 3 Cumulative Area

The Black Sea exporters of Ukraine and Russia have increased their harvested area and yield at a faster pace than the more established wheat exporters (US, EU, Australia and Canada). A cumulative % change of 22% in area and 53% in yield since 2010/11 has been seen in Russia and Ukraine compared with -5% and 7% respectively for the same period in the established exporters. It is important to note that Russia and Ukraine are at an earlier stage in their agricultural development, and so start from a lower base, especially in regards to yields.

The US wheat harvested area in 2017 was the lowest since 1890. Furthermore, the USDA has estimated US winter wheat plantings in 2018 as the lowest since 1909. With recent weather concerns over hot and dry weather in the US Plains, this highlights how production has become more vulnerable.

Australian wheat yields have experienced the positive and negative effects of weather in recent seasons. The 2016/17 crop was the highest on record as a result of favourable conditions, with 30.4Mt produced and record yields of 2.6t/ha. However, due to unfavourable weather in 2017/18 a decline in production of 29% on the year is forecast, the lowest output in 9 years, demonstrating the unpredictable influence of weather on yields. 

Trends in global wheat production: An importers perspective         

In 2017/18, Indonesia is forecast to become the world’s top wheat importer, toppling Egypt from the position it has held since 2006/07.

Looking at the combined figures for the projected top six wheat importers in 2017/18 over the past 50 years, we can see that imports have tracked domestic consumption upwards (Figure 4). However, during the same period, production has not increased at the same rate and has remained relatively flat since 2012/13. Production forecasts for 2017/18 in the top six wheat importing countries sit 1.4Mt below the five year average for output, thus potentially indicating a need for increased imports this season. Additionally, the stocks to use ratio of wheat in the importing countries has declined slightly in the past six years, whilst demand has grown. This indicates that if a severe weather event did occur in one of the major wheat producers, there is a relatively smaller cushion for these importers to fall back upon if imports were harder to obtain. 

Figure 4 Five Year Rolling Average

Stocks: a false sense of security?

Despite global stocks rising over recent years, it’s important to know where these stocks are and their accessibility. Some large producing nations, such as China, do not currently export surplus wheat, making it unavailable to wider markets. Since 2007/08, China has increased its stockpile by 225%, giving it a 64% share of the 138Mt increase in global wheat stocks over this period. Recent increases in Chinese stocks are likely linked to the country’s effort to become self-sufficient in wheat, with state supported prices providing incentive for Chinese farmers to grow the crop.

Looking at the proportion of global stocks held by the top wheat exporters, China shows a contrasting picture (Figure 5). The proportion of global wheat stocks held by China has increased from 27% in the 2008/09 season and is projected reach 48% in 2017/18. In contrast, the proportion of wheat stocks held by the top exporters is projected to decline from 36% to 25% in the same period, indicating a lower proportion of accessible global wheat stocks.

Globally, the stocks to use ratio of wheat has been increasing and is projected to reach 36% in 2017/18. However, the global wheat stocks-to-use-ratio excluding China has been declining in recent years and is forecast at 22% in 2017/18 (23% in 2016/17). The global stocks cushion which is accessible is therefore lower than what the headlines suggest. This puts into perspective the potential risk faced if the wheat production in any of the top six exporting nations is reduced. 

Figure 5 Proportion Of Global Stocks

Is higher price volatility around the corner?

Aside from wheat, record production has also been achieved for other grains in the past five years. This includes huge global harvests for maize of over 1,000Mt in 2014/15 and 2016/17, with another projected for 2017/18. The high production of maize, in addition to recent record wheat harvests, has saturated the grain market. This has pressured prices over the past five years with nearby Chicago wheat futures remaining low historically, hovering around £115.00-£130.00/t with occasional spikes since the 2014/15 season. UK wheat prices have also felt the impact, but tighter domestic supplies this and last season, along with a devaluation of sterling, have provided some support.

As illustrated in Figure 6, global and UK wheat prices have been less volatile in recent years, with the UK and US currently sitting below the average level volatility (daily price change) since 1999/00. Should the unprecedented run of global surplus wheat production come to an end, it is likely that we will return to a period of higher volatility. Additionally a severe global production reduction, through poor yield returns, might cause increased wheat planting the following year to maximise wheat production.

Figure 6 Annualised Volatility

Concluding comments

Although world wheat production and stocks are currently in a healthy state, a risk is emerging. The increasing demand for wheat is driving pressure for continued production increases. Although technological advancements continue to promote yield increases, the reliance on yield performance is greater than ever, compounded by the lack of growth in the wheat area globally over the past 30 years.

The top wheat exporters are exposed to a greater reliance on yield and are holding a lower proportion of global stocks. At the same time, the requirements of importers are increasing. The recent unprecedented run of good weather and resulting plentiful supply have masked the issues that have been building beneath the surface, and a rude awakening could be around the corner. Therefore global wheat faces a growing risk for production levels, with less accessible stocks to soften any blow.

The increasing reliance on Russia for global wheat supply is another issue to be wary of and will be looked at in detail in the next article in this series. 

Key points

  • Recent favourable weather promoting high wheat yields and production has masked a potential risk of stagnant growth in global wheat area.
  • The top exporters of wheat globally show mixed wheat production trends in recent years, with Russia and Ukraine increasing area and yield whilst the US has seen area declines.
  • Increasing demand for wheat, coupled with lower available stocks held by top exporters’, increases pressure on production.
  • The lack of recent volatility in global wheat futures epitomises the high wheat production observed recently. If yields fall and production declines, greater price volatility may return. 

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