Introduction to wheat
Globally, more hectares are planted to wheat than any other grain or cereal. It is a vital food grain that is used to make a variety of products and is prevalent in the diets of people across the globe.
Unlike the other agricultural grain benchmark products traded on the Exchange, such as corn and soybeans, wheat grown in different countries has varying characteristics. In other words, the commodity is not as homogeneous as some other grains or oilseeds. Wheat is grown in several different regions across the world and each variety is unique with varying characteristics and end uses.
Generally, wheat is classified based on three characteristics: the season in which it is grown, the hardness of the wheat kernel and the color. The growing seasons for wheat can be winter or spring, the hardness can be categorized as hard or soft, and the color can be red or white.
Wheat classes and their uses
In the United States, there are six wheat classes, which are grown to various degrees. The most commonly grown domestic wheat is hard red winter (HRW). It is grown mostly in the central U.S. and represents anywhere from one-third to one half total U.S. wheat production, depending on the year. The protein content of HRW can vary from 10 percent to 13 percent, and the gluten content is moderate. This makes HRW the ideal class of wheat for milling and baking products like harder breads.
Hard red spring (HRS) wheat has become a larger share of U.S. wheat production over time. It was only around 15 percent of the U.S. wheat crop in the late 1980s, but now accounts for approximately one-quarter of total U.S. production. It is generally found in the northern U.S. and into Canada, and has a relatively high protein content of 12 to 15 percent. HRS has strong gluten content, making it useful in the creation of products like rolls, bagels and crusts.
The last significant wheat class grown in the U.S. is soft red winter (SRW) wheat. It is grown mainly in areas surrounding the Mississippi River and in the eastern U.S. SRW tends to be lower in protein – anywhere from around 8.5 to 10.5 percent – and has weaker gluten. This makes SRW the right class of wheat for cookies, cakes, crackers and for blending with other wheat classes. SRW is also the only wheat class that has consistently been used in animal feed – on an annual basis, some other classes will be used in the feed market, but in the case of SRW, anywhere from 10 percent to 20 percent of total domestic supply is destined for the feed market. In the U.S., only three percent of domestic supply of wheat is used for feed, while 35 to 40 percent is used for food and 30 to 35 percent is destined for the export market. The remainder is used for seed or stocks.
Just as there are different classes of wheat grown within the U.S., there are derivations in the types of wheat grown and used across the world. The U.S. is known for producing more winter wheat than spring wheat, more red wheat than white wheat and more hard wheat than soft wheat. The Black Sea, and specifically Russia, used to be dominated by spring wheat, but improved winter wheat yields means that it now represents about half of total Russian production. The vast majority of Russian wheat is soft wheat, while the majority of Ukrainian wheat is hard red wheat. The European Union, like the U.S., produces more winter wheat than spring wheat, but unlike the U.S., it generally produces more soft wheat and white wheat.
The global wheat export market has become more diverse over time. Until the early 2000s, the U.S. exported more wheat than the next four exporting countries and the remainder of the world combined. However, not only did total U.S. wheat exports decrease over time, but the U.S. share of global wheat exports has also diminished significantly.
Global wheat production
Wheat is produced around the world – mainly in China, India, the European Union, Russia and the United States. However, some of the largest producing countries – namely China and India – are also significant consumers, so they are not as engaged in global export trade. The top five exporters of wheat are Russia, the European Union, Canada, Australia and the United States. Other countries, such as Ukraine and Kazakhstan, have seen significant increases in wheat exports over time, adding to the increased diversity in export origins. In 1980, the current top five exporters of wheat were responsible for approximately 90 percent of total wheat exports, whereas they only made up about 70 percent in the most recent crop year.
Similar to exports, the global importation of wheat has also gotten more diverse over time. While it was always less heavily concentrated than exports, countries outside the top five net importers, which consist of Egypt, China, Indonesia, Algeria and Turkey, currently import 25% of net global wheat imports. This illustrates how relevant the wheat crop is in nearly every country across the world. In general, each major producing region has relationships with importing countries that generate consistent trade flows. For example, the U.S. tends to export wheat to Mexico, Japan and to a slightly lesser extent, Brazil, while the European Union supplies some North African and Middle Eastern countries, Russia sends its wheat predominately to North Africa, Middle East, Far East and Turkey, Canada sells to China and Japan, and Australia feeds the southeast Asian nations. However, when supply shocks occur, these trade flows can be disrupted. For example, the Russia-Ukraine conflict has led several countries to turn to the European Union to make up for a slowdown in available Black Sea exports.
Managing risk with Wheat contracts
The diversity of the world wheat market helps support the numerous risk management tools that are available to manage price risk. Each tool – futures contracts for different types of U.S. wheat, Australian wheat and Canadian wheat traded on the Chicago Board of Trade as well as a Euronext Milling Wheat futures contract for European wheat – allow agribusinesses with global exposure a way to manage price and counterparty risk for multiple classes and production sources of one of the world’s most important cereal grains.
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Originally Posted October 3, 2024 – Understanding the Global Wheat Landscape
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
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