ARLINGTON, VIRGINIA, U.S. — With fundamental factors well established, wheat futures markets thus far in 2016 are reacting mainly to changing government policies, notably those of Argentina, Egypt and Russia, the U.S. Wheat Associates (USW) reported on Feb. 11. Markets dipped when Argentina’s government removed export barriers. Prices rose and fell with each new rumor about the Russian export tariff, and fell again when Egypt’s muddled import requirements led to two cancelled General Authority for Supply of Commodities (GASC) tenders, slowing the pace of wheat imports by the world’s largest buyer

In December, Argentina removed its 23% export tax on wheat, eliminated its wheat export quota and devalued its currency, all of which pushed Argentine wheat to the global market in a big way. According to Reuters, Argentine ports loaded 1.77 million tonnes of wheat between Dec. 14, 2015 and Feb. 5, 2016. The U.S. Department of Agriculture (USDA) pegs total Argentine wheat supply at 14.2 million tonnes and expects exports to reach 6.5 million tonnes in 2015-16.

Removal of the restrictive export policies helped Argentine farmers by giving them more market access. From 2012-13 to 2014-15, USDA estimated that ending stocks there climbed from 288,000 tonnes to 3.17 million tonnes due to increased usage of on-farm silo bag storage. This has given farmers a unique hedge this year because higher protein wheat supplies in Argentina are short and holding better quality wheat will likely mean more revenue. In marketing year 2015-16, USDA expects ending stocks to fall 57% to 1.36 million tonnes, USW said. Though the extent is still being determined, the recent export policy changes for wheat will also affect the Argentine flour industry. The International Grains Council (IGC) expects Argentina to be the sixth largest exporter of flour in the world in 2015-16; Turkey and Kazakhstan are numbers one and two, respectively.

With the U.S. dollar strengthening to 12-year highs in mid-January, and the Russian ruble plunging to record lows, Russian wheat gained competitive price strength. Russia produced 61 million tonnes of wheat in 2015-16, up 3% year over year. On Jan. 27, Russian officials sparked speculation by announcing it was examining its current wheat export tariff, but the government did not say if it would raise or lower the rate, USW said. While Russia has since announced that it will leave the export tax unchanged, further depreciation of the ruble will increase the tax due to the way it is calculated. On Jan. 21, Russian wheat prices offered for an Egyptian tender averaged $187 per tonne ($5.09 per bushel) free-on-board (FOB). The Russian export tax of 50% of the customs price minus 6,500 rubles ($83) per tonne but not less than 10 rubles per tonne on $187 per tonnes of wheat adds roughly $10 per tonne.

Since 2008, Russia has restricted wheat exports three times, including the 2015 export tax increase, in order to control domestic food prices and inflation. The uncertainty about export policies and limited on-farm storage capacity in Russia create an incentive for Russian exporters to front-load their sales each marketing year to ensure they sell as much wheat as possible, regardless of price. In the first half of 2015-16, Russia exported 17.2 million tonnes according to SovEcon, a Russian consultancy. USDA predicts total Russian exports in 2015-16 will reach 23.5 million tonnes.

After four weeks of debate, Egypt’s Agriculture Quarantine Authority announced that it would accept the GASC 0.05% ergot fungus specification for imported wheat. However, GASC cancelled its most recent tenders after continued uncertainty forced traders to reevaluate the risk involved. All traders boycotted GASC’s first tender, then only a few bids came in on the second tender, each with a $10 to $20 per tonne risk premium.  

USDA expects 2015-16 Egypt domestic consumption to increase to 19.6 million tonnes, a 3% increase year over year. To meet the growing demand, Egypt is expected to import 11.5 million tonnes of wheat in 2015-16, a 4% increase from the prior year. About half of Egypt’s wheat imports go directly to production of subsidized flat bread (Baladi bread) to maintain the food security of its 92 million citizens. Reuters reported Egypt’s strategic wheat reserves would last until May 11, time Egypt’s government buyers can use to work on regaining trader confidence.

Markets will continue to adjust as the long-term implications of these policy changes become clear, but in the short-term, buyers and sellers need to weather the inevitable price volatility that always result, USW said.