Out With The Oil, In With The New

This time of the year is key for the winter wheat markets. By now, almost all of the winter wheat should be sown across the US, EU and Black Sea Regions, and the date that it went into the ground has a huge affect on yields. Wheat that was seeded earlier will use more soil water by the time Autumn rolls around. That leaves less water available during the Winter and early Spring, which in turn keeps the yield lower. But by waiting longer, you risk outside sources of pests and invasive weeds getting to that soil moisture, which in turn will affect yields. Consequently decisions on when to plant are seriously considered.

And once that crop is in the ground all eyes are on the weather forecast, where unseasonal weather can significantly affect germination rates. Recently, periods of dry weather were already lifting US wheat prices, as investors saw the lack of rain as a potential for lower yields going forward.

The days of the oil-rich oligarchs may not be over yet, but arguably they could one day be replaced by the humble farmer. .

But before we get ahead of ourselves and look to the 2016/17 harvest, we have to focus on the significant events of the 2015/16 season. The biggest surprise was that Russia took the crown as the world largest producer of wheat, beating both the EU and the US. They recorded a bumper harvest of over 30million tonnes of export ready wheat, with the country boasting that they will increase this to 130million tonnes by 2025.

The meteoric rise of Russian wheat imports is significant, as is the speed at which this has happened. Russia only re-entered the wheat markets back in 2002, having quit the markets back in the late 1990s after the collapse of collective farming. With President Putin’s decree that he wants the country to be 100% self-sufficient for food by 2020, this year’s wheat harvest has shown that the country is well on its way.

But the rise of Russia’s wheat yields is not just down to a sudden urge to become self-sufficient. The country is the second largest oil producer in the world, and the low prices and global glut is hitting the nation hard. Despite the potential of OPEC oil limits and a fall in Saudi Arabian production, more US rigs are coming online and the global over-supply endures.

Furthermore, if you look at the available data one can suggest that Russia may be using wheat and the wider investment into agriculture as a way to safe-guard it from low oil prices now and in the future. Added to that, predictions on when Russian oil production will peak points to a date in the not to distant future, if it hasn’t already occurred. Agricultural exports are only set to get bigger, so Russia is currently seizing market share as the power of its other major export dwindles.

With that in mind, it is easy to argue that the shift to agriculture could be because of insider knowledge into the oil fields, that Russia’s supply isn’t what it once was, and that the country is shifting towards a new market to dominate. As Agriculture Minister Alexander Tkachev explained recently that “[e]xports give us a flow of cash, hard currency, from which our farm producers get rich”.

The days of the oil-rich oligarchs may not be over yet, but arguably they could one day be replaced by the humble farmer.

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