The global wheat market is heading for an imbalance in the supply of high and low-protein milling grades this year, as above-average yields in the northern hemisphere have resulted in a lower-protein crop for the 2022-23 harvest.
Europe
In the EU, Germany is expecting protein content of the wheat just harvested to be between 0.8-1.0 percentage points below average. Baltic countries, which typically compete with Germany in the high-protein wheat market, also have lower availability to offer this year following heavy rainfall in the summer, with the spreads between 12.5-13.5pc and 13.5-14pc protein wheat heard this week as wide as €15/t ($15/t) on a fob basis. And in France, which typically caters for low-protein, 11-11.5pc export market, latest government estimates rate 56pc of wheat this year at below 11.5pc protein, with the share of the crop above 12pc at just 19pc.
Russia
In Russia, where this year's wheat harvest is expected at a record volume, abundant rainfall during threshing has weighed on protein levels.
"This year, for every offer of Russian high-quality 13.5pc protein wheat, we receive about three or four offers of feed wheat," a trader said. "Last year, we mostly traded 12.5pc."
In 2021-22, about 46pc of soft wheat harvested in Russia was 12.5pc protein quality or above, according to the state centre for grain quality assessment.
This marketing year, however, limited availability of replacement parts for imported agricultural equipment has resulted in delays in grain harvesting and led to a significant decrease in quality, Russian Grain Union president Arkady Zlochevsky said.
The central part of Russia has suffered the most. "There is no grain quality in central Russia this year — mainly feed," the head of Russian Altai Krai agricultural union Alexander Chebotaev said. "For winter crops, we can say that there is no gluten […]. This has never happened. This year, we have 11.5pc wheat everywhere."
And Russian wheat this year also has higher bug content, as farmers applied low-quality pesticides owing to financial and logistical challenges that they faced after the start of the military conflict in Ukraine. "Our export-bound wheat this year has lower-than-usual gluten content and a high bedbug pest turtle — about 13pc compared with below 2pc in previous years," a trader said.
Canada
In Canada's Prairies, farmers generally expect a lower protein content this year because of heavy rainfall causing greater yields, findings from Argus' crop tour show. For some farmers, this could still mean a crop with a protein content as high as 15.2pc. But for a significant number of producers on the threshold of regional exporters' requirements, a slight drop in protein will weigh considerably on the price per bushel — exporters typically contract farmers for wheat of minimum 13pc protein content and may charge penalties if farmers are unable to supply this quality come harvest time. This means that farmers are holding back from selling volumes pre-harvest this year, which could result in a slow start to Canada's exports this marketing year, while a lower-protein offering could, unusually, put Canadian wheat into direct competition with other northern hemisphere suppliers.
A marketing year to test protein premiums
Both buyers and exporters will be closely watching the spreads between high and low protein prices this year, as the market reaction could set a precedent for subsequent crop campaigns.
Greater premiums for high-protein wheat could cause buyers to ration their purchases by blending small volumes with lower-grade wheat to achieve the required protein content. But weaker protein is in general a sign of lower-quality wheat, and other factors, for example, a low Hagberg falling number, could also be a problem for millers.
But for now, German domestic buyers are prepared to pay an unusually high premium for wheat of 13pc protein content or above this year.
In parts of the Prairies where the wheat market is dominated by exporters as opposed to feed buyers, farmers still feel the pressure to maintain high-protein wheat production despite targeting increasingly higher yields.
This year's high-protein crop prices could be a deciding factor in planting for next year's campaign. Greater quantities of nitrogen fertilizer are required to raise the protein content of wheat crops, but fertilizer prices currently represent the single biggest factor in farmers' surging input costs. Prices across the fertilizer complex have risen sharply since mid-2021 on tight supply in the global market. Higher European wholesale gas prices have driven nitrogen and phosphate prices, while a drop in phosphates exports from China and potash exports from Belarus has squeezed availability.
Higher fertilizer prices have so far been manageable for northern hemisphere farmers, with higher crop prices providing enough cash flow to meet the surge in input costs. But as wheat farmers finish the harvest and return to the fertilizer market in the autumn ready for the new growing season, they are likely to be greeted with stubbornly high and volatile nitrogen costs. This could deter some farmers and encourage them to settle for a lower protein crop in 2023.
