War Disruptions and Logistics Incentivize Imported European Wheat

The news that U.S. flour milling companies have imported European wheat has raised concerns and frustrations for U.S. wheat stakeholders. To an organization like U.S. Wheat Associates (USW) that with our state wheat commission members promotes exports on behalf of U.S. wheat farmers, such news is particularly disappointing. After all, U.S. farmers produce enough wheat each year to meet domestic demand and still offer about half the crop to export markets.

The concern is not about imported wheat per se. Flour millers do import varying amounts of Canadian spring wheat every year. And conditions have in the past made it possible for feed-grade wheat to be imported into coastal pork and poultry production markets. It is important to state that there is more than enough high-quality U.S. wheat available to produce all the flour we need in this country, and the 2023 harvest is already underway.

However, imported European wheat to produce domestic flour is a highly unusual situation. USW wanted to share what is behind these imports and perhaps answer the questions from stakeholders.

Dynamic market factors have created a large price spread between similar classes of European and U.S. wheat. In May 2023, according to AgriCensus data, the published FOB export price for Polish wheat was more than $107 per metric ton less than the U.S. hard red winter (HRW) Gulf FOB export price. German wheat export price in May showed a similar discount to Gulf HRW FOB.

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 importsincreased 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.

A 2020 study by USDA found that rail rates increased by 30% for wheat, 32% for corn, and 30% for soybeans from 2000 to 2014, and wheat rail tariff rates have increased by an additional 18% since 2014. Rising and unfair rail rates for wheat erode its competitiveness for domestic as well as overseas buyers.

That is why USW's Transportation Working Group is focused on addressing uncompetitive wheat rail tariff rates to make sure that when global market conditions readjust - and they will - domestic rail rates for wheat do not diminish U.S. wheat's value at home and abroad.

An Unwanted Hit

Without doubt, the import of European wheat and the market factors that encouraged it are most unfortunate. As Kansas Wheat Vice President of Research and Operations Aaron Harries said, this situation is "another hit against our domestic farmers" who are battling drought, increased operating costs and other headwinds to produce high quality wheat that is more than sufficient to supply all U.S. flour mills and export demand.

USW and others in the industry believe the imported European wheat will likely move to coastal U.S. flour mills - in part because of the high rail rates milling companies would have to pay to transport it to interior mills.

The supply challenges in today's global wheat market are likely to continue at least through the 2023 harvest. USW sincerely believes that absent the illegal and highly disruptive invasion of Ukraine, the price spread incentivizing U.S. imports would be much closer. Sadly, the conflict rages on.

Domestically, higher wheat prices also encourage increased production, seen in the significant increase in U.S. HRW planted area for the 2023 crop. Unfortunately, the devastating drought undercut that positive trend this year, but prices remain an incentive for U.S. farmers.

If there is a grace note to this situation, USW President Peterson points out that the price spread between EU wheat and U.S. HRW wheat has recently narrowed. The potential for recent rainfall in Northern Plains HRW and hard red spring production regions to push 2022/23 production higher than expected would help fill the price gap - and offers hope for a better outcome in 2023/24.

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