Russia’s footprint in the world wheat market just got larger.
The country has, of course, been making huge strides for years in fulfilling its potential as a wheat grower, more than doubling its output so far this century to 78m tonnes as of 2021, on a trailing five-year average basis.
That is far better growth than other producers have managed. Russia, after entering the century with a harvest equivalent to 5.3% of the world total, last year managed 9.6%, on US Department of Agriculture data.
That trend has gone into overdrive this year, as Russia has seen its output far exceed earlier expectations (and not just because of inclusion of crop from occupied parts of Ukraine) while crops in many other leading growers have been shrunk by drought.
Russia vs Argentina, US
The USDA early last month increased to a record 11.6% its estimate for Russia’s proportion of the world’s total 2022 wheat harvest, from the 10.3% pencilled into the initial forecasts, in May.
That proportion, based on a Russian harvest of 91m tonnes, looks like increasing further given subsequent events.
Estimates for Russia’ harvest have swollen, to 100m tonnes according to some commentators (although the USDA, which refuses to include annexed Ukrainian territory in its calculations is unlikely to get to that level).
Meanwhile, last week saw the US downgrade its wheat harvest by 3.6m tonnes, while some estimates for Argentina’s have shrunk as low as 16.5m tonnes, well below the 19m tonnes the USDA has been factoring in.
Even including some improved expectations for Europe – the European Union on Friday upgraded its wheat output estimate by 1.3m tonnes – it is not difficult to a situation where the world relies on Russia for 12%, or nearly one-in-eight, of its wheat kernels.
The question is how much that matters.
And on the face of it, a lot, given the importance of wheat as a food source, and Russia’s habit of using commodities for political ends, as it has done with natural gas, in interrupting supplies to Europe, which has opposed the country’s invasion of Ukraine.
It is not difficult to envisage a scenario in which Russia’s President Vladimir Putin uses the country’s wheat mountain as a bargaining chip.
However, his position is not as powerful as might appear, for various reasons.
One is that, however well Russia is doing in wheat production, it is in exports that international market power really lies.
And there the country is hitting against limits – logistically, and transactionally too with the Western sanctions making many merchants reluctant to do too much business with Russia.
The USDA has appeared reluctant to lift its forecast for Russian exports above 40m tonnes, and the International Grains Council above 36.6m tonnes, despite increased harvest estimates.
A second is that Russia in wheat exports, unlike gas, has only very limited scope for upsetting the Western nations that Mr Putin really wants to get back at for supporting Ukraine against his invasion.
The likes of the European Union and the US are big wheat exporters themselves.
The political capital that Mr Putin can gain from putting the squeeze on big importers such as the Middle East and North Africa is not nearly as useful, and risky to extract, given the sensitivities over restricting food supplies.
Besides, Russia itself has much to lose from the West further tightening sanctions, and deterring further grain merchants from trading with the country.
The supply boom brought by a bumper harvest has already sent Russian wheat values well below those of rival exporters.
The more that inventories back-up, the more than discount will widen, undermining the likelihood of the country’s farmers trying anywhere near as hard with their 2023 crop.
What makes these considerations all the more sensitive is that the UN-brokered deal, which saw Russia allow Ukraine grain exports safe passage, is well over half-way through, and stands to end in mid-November.
Mr Putin has already lodged complaints about the deal. It looks likely he will seek some concessions to extend it.
Negotiators should appreciate that as far as wheat itself goes, Russia’s hand is not as strong as it looks.