Despite the collapse in wheat prices over the last nine months, they remain about 20% above pre-pandemic levels. The United States grain industry is still pulling in huge profits as the global market price has risen more sharply than the domestic cost of production. Last week, John Deere surprised Wall Street with a big earnings report fueled by farmers reinvesting in new equipment, a sign they are optimistic that prices will continue to be inflated.

The May WASDE report provided the first official projections for the 2023/24 wheat crop. Domestic wheat production is forecast to be 1.66 billion bushels with ending stocks of 556 million bushels, both slightly below market expectations. Combined with wide scale crop abandonment in Kansas and across the Great Plains, that was enough to provide a boost to wheat prices for the first time in months.

A closer look at the report shows an expectation that total wheat acreage will increase 9% to 50 million acres, the most since 2017. At the same time, exports are forecast to drop by 50 million bushels to 725 million, the lowest since 1971/72. With planted acres increasing and exports decreasing, one might logically have expected the forecast to call for greater supply and ending stockpiles.

Wheat Exports Decline in Past Year

Looking at U.S. wheat exports from June 2022 through March 2023, they saw a decline of 4% from the same period one year earlier. That figure seems counterintuitive to many because during the previous year there was not a war being fought between Russia and Ukraine, two of the world’s largest wheat producers and exporters.

When Russia invaded Ukraine in early 2022, grain prices increased on the assumption that both nations would face trouble getting their product to market. Russia would be slapped with sanctions, and Ukraine would have difficulty planting and harvesting in a war zone. The biggest perceived threat was that Russia would prevent Ukraine from using the Black Sea Grain Corridor, their only real path to the global market.

Both countries eventually agreed to the “The Black Sea Grain Initiative,” an agreement put in place last summer to keep the corridor open, and grain continued to flow. Grain traders circled May 18 on their calendars, the date set for expiration of the agreement. Most expected Russian President Vladimir Putin to let the deal dissolve. From a strategic standpoint, a closed Black Sea corridor hurts Ukraine more than Russia.

To the surprise and relief of many, a last-minute deal was struck to keep the Black Sea corridor open for another 60 days. The United Nations and Turkey brokered the deal. The UN was motivated by soaring global food prices, and the risk of famine in developing countries. It’s unlikely that the humanitarian argument swayed Putin, and it had more to do with what was happening in Turkey.

The Importance of Turkey to Black Sea Trade Corridor

In order to pass from the Black Sea to the Mediterranean, and then on to the rest of the world, ships must pass through Turkey. The Turks are motivated to keep the conflict from spreading throughout the region, and they also have financial incentive to continue having global commerce pass through their waters.

The Black Sea Grain Initiative is an important political issue in Turkey, which happened to be holding national elections on May 14th, just four days prior to the deal’s slated expiration date. Incumbent President Tayyip Erdogan, who has a good relationship with Putin, ran on the platform that he could help broker a peaceful resolution between the warring nations.

If Erdogan had been reelected on May 14th it’s likely Putin would have let the deal expire as expected, but the election was close enough that Turkey held a runoff election at the end of the month. This meant that ending the deal on May 18 would have created a political liability for Erdogan, something Putin would not want to do. Hence the extension, but only for 60 days. Erdogan won the runoff, and the deal is still set to expire once again in mid-July, just as the Ukrainian harvest is getting into full swing.

Conclusion and Outlook

Domestic U.S. wheat production will continue unabated, but the global supply will be impacted greatly if the Black Sea is shut down in two months. In addition to keeping Russian and Ukrainian grain from reaching the market, it would also impact production in other nations that rely on fertilizer from Russia which is also shipped through the corridor.

We don’t know whether Russia will ultimately do away with the Black Sea Grain Initiative, but the threat will hang over this market for at least two more months and probably through the remainder of this year’s harvest.

In addition, the wheat market has heavily discounted any weather premium for this year’s crop. At the current depressed price levels, any hint of “too hot, too cold, too wet, too dry” could easily spike prices.

For those reasons, the upside potential for wheat prices outweighs the downside risk at this point.