Black Sea Wheat Is Rocking The Grain World

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As little as one hundred years ago, the majority of grain traded throughout the world could not travel further than a few towns or counties over.  The risk of crop spoilage in the age prior to refrigeration and mass transport represented a very real threat to the global food supply, a risk that now can be mitigated through technology like dry ice and convection cooling.  The food that arrives on your plate as a slice of bread or a taco shell or bed of rice could come from halfway across the world, if not further.  American farmers have had to learn this lesson the hard way as free trade makes US crops unprofitable compared to many foreign entities.  For once in this lifetime, however, the threat stems not from inexpensive east Asian stocks but from inexpensive west Asian stocks -- more specifically, the Black Sea wheat crop that has dominated the global feed market.  The influx of this grain hasn't just pushed the needle on wheat prices, but also the biggest competitor: North and South American corn.

Bread Baskets

From the mountains of the Czech Republic to the northern deserts of China lies the world's largest continual grasslands, the Russian steppe.  This ten thousand mile stretch of gently flowing hill country provides the perfect growing conditions for huge quantities of grain if not for the constant threat of an early freeze or late thaw across a stretch of land that's farther north than any point in the continental United States.  Harsh winter weather hits the steppe particularly hard and, in turn, wrecks havoc on the broader Euro-Asian economy.  The Soviet economy suffered from grain shortages throughout the 1980s, necessitating the purchase of wheat from the US and Canada in a move that sped up the decline of the USSR and the end of the Cold War.  Commodity investors should usually pray for bad weather, as longer winters will lead to foodstuff shortages, poor mining numbers, or increasing demand for fossil fuels, but the rise of carbon in the atmosphere creates longer growing seasons and more bountiful harvests, provided that the crops in question have enough space to grow.  The Black Sea growing region of southern Russia, Ukraine, and Romania enjoyed just such a mild winter, resulting in one of the strongest harvests in recent memory.  Despite the instability in Ukraine and Russia alike, output of wheat grew to some 85 million tons, with the expectations that Black Sea wheat output could reach 200 million by 2020.  With grain coming in cheap and plentiful, growers from other parts of the world find themselves unable to compete on the market.

Coming In, Going Out

The cheap cost of Black Sea wheat in comparison to corn from the United States, Canada, Brazil, and Mexico makes the buying decision rather easy for a variety of Asian nations looking for livestock feed (Black Sea wheat makes for poor bread but happy hogs).  South Korea, Thailand, and the Philippines put in a fresh order for three million tons of Black Sea wheat for delivery by the end of 2015, a figure worth over half a billion dollars.  Singapore quickly followed suit with half a million tons of their own, noting how much cheaper the Black Sea grain cost in comparison to corn from the Americas.  Indonesia, the world's second-largest wheat consumer, chose to purchase Ukrainian wheat for $30 per ton less than Australian wheat during the month of June despite having to transport the grain 300 times as far.  As Australia ships over a billion dollars of wheat to Indonesia each year, accounting for over 50% of the supply, the shift in purchasing power has made the Aussies nervous at a time when the alternatives for farmers, such as raising beef, offer no surety of value.  Benchmark American wheat prices fell by about twenty percent after the spring harvest due to weak demand and the need to compete with the cheaper alternative, making wheat nearly as affordable, if not more, than corn.  Nor has Black Sea wheat colonized just the coastal nations of Asia.  No nation in the world imports more wheat than Egypt and the Egyptian ministry of trade has made it clear where they intend to go to fill up their shopping cart.  As corn hits $220 a ton on the back of weaker harvests throughout the Americas, farmers with the option to buy one or the other will usually choose wheat for the greater protein concentration and the lower quantity of waste. 

The Corn Market

US futures for corn delivery dropped by over ten percent through the month of July as the lack of adverse weather in the midwest US makes most growers appear to face fierce competition to sell off their stock.  While we can depend on many allies for consistent corn demand, such as South Korea's ten million tons of imports per year, the South Korean market sees wheat as a very valuable alternative.  During June alone, South Korea imported one million tons of Black Sea wheat, indicating a major shift in buying and selling power for the golden kernels.  Nor will the United States suffer in silence.  Brazil's corn crop in 2015 will expand by nearly twenty percent compared to their 2014 harvest and the Brazilian nation, already reeling from recession, faces the unhappy prospect of allowing their stocks to grow stale if they cannot find a buyer. 

The Harvest

  • Remember that weather patterns affect grain commodities more than any other factors.  The NOAA reports a stronger El Nino effect through 2016, likely leading to a mild winter and a strong harvest for corn.  Don't look to corn as an opportunity for good growth in the next six months.
  • Wheat has dropped consistently for the past three years.  Currently trading at five-year lows, a risk-tolerant investor can buy wheat ETFs or mutual funds in order to capitalize on good value.  That said, wheat needs a catalyst for a turnaround with few options on the horizon.
  • Cheaper feed makes for cheaper livestock commodities.  Most of the grain from the Black Sea feeds cattle and pigs, making it smart to short-sell meat commodities through the next six months and profit from the deflation of farm animals.

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