Analysis: Weather woes, Russia upend outlook for global wheat suppliers

[1/2]Combines harvest wheat in a field in the course of Russia-Ukraine conflict near the settlement of Nikolske in the Donetsk Region, Russian-controlled Ukraine, July 19, 2023. REUTERS/Alexander Ermochenko/File Photo

CHICAGO, Aug 2 (Reuters) - Drought is expected to send global wheat stockpiles for major exporters to the lowest levels in more than a decade, a Reuters analysis shows, a decline coming as top supplier Russia intensifies its conflict with Ukraine and creates more uncertainty for importers.

Farms in areas of North and South America, Europe and Australia are facing crop losses as extreme weather spreads over an unusually wide geographic area, making food production increasingly vulnerable. Escalating tensions between Russia and Ukraine have also returned concerns over food security to the forefront of grain trading and diplomacy.

A Reuters analysis of U.S. estimates of wheat inventories and crop usage for seven major exporters shows stockpile levels will dwindle to a 16-year low in 2023-24. Removing Russia, the U.S. and the EU drops the ratio to its lowest since at least 1960, reflecting tight supplies in important shippers like Australia, Canada and Argentina, the analysis shows.

Russia is expected to boost shipments due to large harvests, overcoming periods of dryness in places like Siberia.

The Kremlin's July 17 exit from the Black Sea deal that allowed the safe export of Ukraine's grain adds uncertainty to the global outlook. Subsequent air strikes on Ukrainian ports destroyed an estimated 180,000 metric tons of crops over nine days.

"The world has no supply cushion to fall back upon," said Dan Basse, president of consultancy AgResource Company. "If there's an issue in the Black Sea with Russian exports, the wheat market gets very spicy, very quickly."

Already, supply worries sparked volatile moves in wheat prices, including a July 19 spike that was the biggest daily gain since the days after Russia invaded Ukraine in February 2022.

Wheat importers with limited reserves on hand are vulnerable to price and supply shocks. For months, some buyers in Asia, the Middle East and Africa have only been buying enough to cover their short-term needs, in part because of expectations for Russia's large harvest, traders said.

Supply risks in the Black Sea now appear to extend beyond Ukraine to Russia's exports, said Alexander Karavaytsev, senior economist at the International Grains Council. He said 60 million tons of Russian and Ukrainian exports could be under threat, or one-third of global trade.

"Lower than initially anticipated plantings in Argentina, current crop quality worries in parts of Europe, as well as weather issues in two other major exporters - the U.S. and Canada - don't help the supply situation," Karavaytsev said.

July is thought to have been the world's hottest month on record.

Dryness in the northern U.S. and Canada has reduced the potential for harvests of protein-rich spring wheat and durum wheat, hurting crops used to make pastries and pasta. Analysts warn farms may suffer more damage before harvests.

Drought conditions in Canada are similar to 2021-22, when production fell about 37% from the previous year, said Kelly Goughary, senior research analyst for Gro Intelligence.

The crop forecaster is expecting a greater than 5% cut in U.S. spring wheat yields from last year, after drought also drove Kansas farmers to abandon winter wheat fields.

In North Dakota, farmer Chad Weckerly said his durum wheat will yield 20% to 30% less than last year. He is frustrated by projections that Russia's big crop will make up for losses elsewhere in the world.

"That Russia news just drives me up a tree because nobody knows what Russia has," Weckerly said.

U.S. and Russian government estimates of Russia's crop vary. For 2023-24, the U.S. estimates Russia's wheat exports will climb 44% from two years ago to 47.5 million tons.

Moscow could slow exports if it is worried about domestic bread prices rising, a trader at a multinational trading house in Europe said.

Fewer ships were also looking to pick up grain from the Black Sea area after Russia quit the export deal, amid growing uncertainty over whether fighting could hit commercial vessels.

The EU needs a big crop to compensate for a reduced harvest last year and uncertainty about the availability of Black Sea wheat, said Stephen Nicholson, Rabobank's global sector strategist for grains and oilseeds.

"If something goes wrong with Russia and Ukraine, we're not in a situation where everything will be okay," Nicholson said. "You're seeing multiple problems around the world and you usually don't see that."

Consultancy Strategie Grains has repeatedly lowered its forecasts for EU wheat harvests and in July pegged production less than 1% above the 2022-23 crop. Conditions ratings have declined in the bloc's top exporter France.

Even so, buyers said they still expect a decent EU crop and are focusing on Russia's large harvest.

In Australia, typically the world's second largest wheat exporter, production will drop by a whopping 34%, below the 10-year average, the country's agricultural department said. Australia supplies buyers in Asia, including China.

China saw its first decline in summer wheat output in seven years after heavy rains. The country has grain reserves, though analysts said lower production and poor crop quality could increase imports. China is continuing to buy Australian wheat and has also depended on Black Sea grain.

In another twist, an Indian ban on non-basmati white rice has further exacerbated worries about potentially tighter global wheat supplies because both crops are used for food, analysts said. India is the world's largest rice exporter and accounts for more than 40% of exports.

"If that can't be replaced and people come back to wheat," AgResource's Basse said, "then we almost have a worse problem than when Russia initially invaded Ukraine."

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