Texas Wheat Producers Feel Impact of Grain Market Disruptions

Dynamic market factors stemming from disruptions in the Black Sea Region and tightening U.S. wheat supplies have led some domestic flour millers to seek wheat from foreign suppliers, causing concern for Texas wheat growers.

In mid-May, reports surfaced that a U.S. flour miller purchased wheat from Poland and Germany for delivery in 2023. Later reports hinted at additional imports, including some set to arrive at the Texas Gulf. The news coincided with the Texas wheat harvest and many farmers faced weakening basis levels at their local elevators.

“With a widening basis and uncertainty around export demand, producers have tough decisions to make about how to market their crop this year,” said Chet Creel, owner of Seed-Tex Grain and Cattle and chairman of the Texas Wheat Producers Board. “Rising storage and transportation costs are an added burden to elevator operators that will further impact cash prices.”

According to data published by the United States Department of Agriculture, the five-year average for basis at this time is $0.15 under the current contract. On June 1, the average statewide basis had more than doubled to $0.39 under the July 2023 contract. Cash prices were even more suppressed in specific areas, with bids at local elevators more than $1.00 lower than the relevant futures contract.

“We could see additional downward pressure on the basis in the short run,” said Matt Gruhlkey, marketing specialist for Attebury Grain. “We can typically rely on carry in the market, but that’s not an option this year. There is also less demand for wheat in the feed industry because of the price compared to corn.”

Wheat prices have traded above $7.00 per bushel since early 2022, which has lent some support, but rising input costs have shrunk margins. Storage capacity is tighter in certain areas where harvest prospects are better than expected due to favorable late-season weather, while export demand has slowed.

According to U.S. Wheat Associates (USW), the U.S. produces more than enough high-quality wheat to keep up with the demand of domestic flour millers. However, there is a large price spread between similar classes of European wheat and U.S. wheat. In May 2023, AgriCensus reported that the free on board (FOB) export price for Polish wheat was more competitive than the HRW Gulf FOB price by more than $107 per metric ton. The German wheat export price had a similar discount compared to Gulf HRW FOB.

“This remarkable difference in prices happened mainly because the relative volume of exportable wheat supplies in Eastern Europe has exploded this year,” USW said.

That growth in exportable supplies can, in part, be attributed to the conflict between Russia and Ukraine. After Russia’s invasion, Ukraine was unable to export wheat and other commodities out of Black Sea ports, in turn sending grain across land borders into Eastern Europe. The sudden influx of wheat depressed local prices, which were already pressured by ample EU production. Additionally, Russia’s record 2023 wheat crop and unfettered exports, projected at a record-breaking 45 million metric tons (MMT), created more regional price pressure.

Meanwhile, U.S. wheat supplies have been on a downward trend for three years due to regional droughts. Spring wheat production was down 44% in 2021, followed by two hard years for HRW, down 14% in 2022 and potentially down an another 3% in 2023.

“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,” USW said.

Competitive EU wheat prices are only part of the problem. The cost to transport wheat via rail in the U.S. is nearly double the ocean freight cost on a per-metric-ton basis. According to USDA, rail rates for wheat increased by 30% from 2000 to 2014, and wheat rail tariff rates have increased by an additional 18% since 2014.

“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.,” USW said.

Texas Wheat is working to address these market conditions by continuing efforts to spur wheat export demand, improve competitiveness through reduced transportation costs and establish a renewed focus on trade policy at the federal level.

“Highlighting the adequate supply and strong quality of the 2023 crop with established domestic customers is top of mind right now,” said Rodney Mosier, Texas Wheat Executive Vice President. “Domestic flour millers rely on U.S. farmers for the vast majority of their wheat needs each year and we are working to understand the unique factors at play to expand the use of Texas-grown wheat.”

In the short-term, the Marketing assistance loans (MALs) available through the Farm Service Agency (FSA) can create more time for producers to market their grain. The loan program allows farmers to delay selling their commodity until more favorable market conditions emerge. For more information and other options, producers are encouraged to contact their local FSA office.