In looking at this difference between the bargain purchase price in Europe versus the current U.S. domestic market replacement values, USW President Vince Peterson recently said that “this may be the biggest trade margin that I’ve ever heard of” in all his years in the grain trade.
Supply Shock
This remarkable difference in prices happened mainly because the relative volume of exportable wheat supplies in Eastern Europe has exploded this year. Putin’s invasion of Ukraine drastically curtailed Ukraine’s ability to export by vessel from its Black Sea ports, in turn sending war-distressed Ukrainian wheat and other commodities pouring across their land borders into Eastern European countries. That movement severely depressed local wheat prices, harming EU farmers and causing five EU countries to implement bans on imported Ukrainian grain staying within their countries. Russia’s record 2023 wheat crop and unfettered exports (now projected at 45 million metric tons (MMT), also a record) created more regional price pressure.
Even though the EU-27 is the world’s second largest wheat producer after China and second largest exporter after Russia, EU wheat imports increased by 6 MMT in the 2022/23 marketing year. Combined with the unprecedented disruption of regional grain movement, USDA estimates the EU’s ending wheat stocks will rise from 10.1 MMT in 2020/21 to 16.2 MMT in 2022/23. And USDA expects European wheat production to increase this year over 2022 even though there is dryness in western Europe.
Yet over the same 3 years, U.S. wheat supplies have gone in the opposite direction, especially supplies of HRW wheat. Drought has hurt total U.S. supplies for three years in a row, first reducing hard red spring and soft white crops. Then drought cut HRW production in 2021/22 and intensified in 2022/23, resulting in a high number of abandoned wheat fields and short overall production. U.S. exportable wheat supply concerns, combined with the disruptive news constantly flowing from the Black Sea conflict, are supply shocks that continue to support the surprisingly high gap between U.S. and EU wheat prices.
Ocean v. Rail Rates
Considering imported European wheat, the question must be asked about the difference in cost between bulk ocean freight rates from Europe to the United States and U.S. rail rates to move wheat to its flour mills. Comparing those rates today, U.S. rail tariffs and fuel charges to transport wheat are close to twice the ocean freight cost on a per-metric-ton basis.
Unfortunately, this transportation cost spread indicates that rail rates have been and continue to be a burden on the value of delivered wheat for domestic and export markets.
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