Global Market – Wheat – U.S. to Maintain Competitiveness in Japan

    Wheat harvest. Photo: Rome Ethredge

    On October 7, 2019, the United States and Japan signed the U.S.-Japan Trade Agreement. This Agreement enhances market access, allowing American farmers and ranchers to remain competitive to other countries receiving preferential treatment in Japan. Since the United States withdrew from the Trans-Pacific Partnership in January 2017, uncertainty for U.S. agricultural competitiveness developed as signs of a trade agreement with Japan appeared bleak.

    Concerns grew as the remaining 11 countries progressed forward to implement the multilateral agreement without the United States, renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), followed by another agreement between Japan and the European Union. Japan is not only the third-largest agricultural export market for the United States, but also the third-largest market for U.S. wheat exports.

    Historically, Japan has been a steady buyer of U.S. wheat as Japanese millers have long held a preference for its quality characteristics. In 2018/19, Japan imported a total of 5.7 million tons of wheat and wheat products with the United States as its largest supplier accounting for 48 percent of imports. Japan mainly imports 3 classes of U.S. wheat: Soft White, Hard Red Spring (HRS), and Hard Red Winter (HRW).

    HRS and HRW together account for about two-thirds of U.S. wheat exports to Japan and are direct competitors to Canada’s Western Red Spring. Without the U.S.-Japan Trade Agreement, Canada’s duty-free countryspecific quota (CSQ) and markup reduction would put the United States at a competitive disadvantage. Australia will also a receive duty-free CSQ and markup reduction; however, Australia’s medium-soft wheat is more comparable to Japanese wheat.

    Concerns for U.S. wheat export competitiveness to Japan have eased as the Agreement was concluded. Once implemented, U.S. wheat will receive the same markup reduction as CPTPP members and a specified quantity of imports at a preferential tariff rate, generally zero, through the creation of a CSQ. The success of this Agreement will level the playing field for U.S. wheat exports to Japan and allow U.S. wheat to maintain its share of the Japanese market.

    EU Wheat Exports Projected at Highest Level in 4 Years

    EU wheat exports are projected to rebound to 28.0 million tons due in large part to its bigger crop. Growing conditions across the region were generally good this year, resulting in production of 152.0 million tons, up more than 15 million from last year’s drought-stricken crop. With abundant supplies, exports are projected to rebound in light of competitive pricing with other wheat suppliers, a rebound in global trade, and ample supplies of domestic feed grains.

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    Competitive Pricing: European wheat prices are more competitive with Russia than they were this time last year. EU exports were competitively positioned in the early months of 2019/20 as Russia’s total supplies are smaller based on reduced carryin which more than offsets a slightly larger crop.

    This stands in contrast to the situation last year, when Russian exports were proceeding at a torrid pace and EU wheat was struggling to reach many regional markets. As indicated by the price chart on the previous page, price quotes for EU (France) as of the end of September are slightly below Russian (Black Sea) quotes. For reference, Russian wheat benefitted from a discount of about $10/MT at the same time last year.

    With its pricing much improved over the same time last year, EU exports have taken off to a much faster start, as indicated by the weekly export chart seen above1. The price competitiveness of EU wheat is evident in purchases by Egypt, the world’s leading importer. Egypt’s recent public tenders have resulted in purchases from a variety of sources, including France and Romania, whereas similar tenders a year ago were more dominated by Russian supplies.

    It is worth noting that in 2018/19, EU wheat exports were backloaded in the second half of the year, taking advantage of a period when Russian supplies became tight.

    Rising Global Trade: Total global trade is projected to rebound this year and the European Union is positioned to benefit from this rising tide. Global trade is projected up about 5 million tons from 2018/19 when consumption dipped in light of tightening global availability. With Russia having tighter supplies overall, the major beneficiaries of larger global wheat trade are expected to be the European Union and Ukraine.

    Abundant Feed Grain Supplies: Even with supplies up significantly, EU wheat feed and residual is projected up only 4.0 million tons this year to 56.0 million. Given the ample supplies, wheat feeding could be larger except that barley and corn are still pricing competitively into feed rations.

    The European Union is expected to have larger supplies of both barley and corn. With EU feed channels not demanding large amounts of wheat, ample supply remains for exporting to international customers.

    European Union Projected to Partially Close the Gap with Russian Wheat

    With all of the aforementioned forces in motion, EU wheat exports are positioned for a strong year. The European Union is projected as the second leading wheat exporter in the world. Russia is still forecast to be the world’s top exporter in 2019/20, although down year-to-year, leaving a more competitive landscape for EU wheat exports. Last year, Russia’s exports exceeded the next leading supplier, the United States, by more than 9 million tons. This year, the gap is projected to narrow with Russia wheat exports only 6.0 million tons larger than EU.

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