Dr. Ken Rietz
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Brazil and the US are generally the two major exporters of agricultural products, such as corn and soybeans. That is not the case for wheat, however. Brazil does not grow enough wheat for its own population, and the US supplies about 10% of what Brazil still needs. Most of the wheat imported by Brazil comes from Argentina, the cheapest source of wheat due to the Mercosur agreement. And this is where the story gets complicated. First, here is the front month futures on CBOT wheat. |
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Figure 1: CBOT front-month futures on US wheat, 2023 to the present Brazil is determined to grow more of its own wheat, and they have settled on using the Cerrado region of Brazil. The Cerrado is a tropical savanna, meaning that the vegetation is mainly drought-resistant grasses and occasional trees. Think of the African Serengeti. The Cerrado runs south and east of the Amazon rainforest and covers about 21% of Brazil. Wheat would struggle to grow in the Cerrado without help. Brazil has spread hundreds of millions of tons of lime and other soil supplements throughout the area to prepare the ground for wheat. Even so, regular wheat would not do well. An Argentinian firm, Bioceres, has developed a genetically modified (GM) wheat that is drought-resistant, and conveniently, also bug-resistant and resistant to weed killer (that is, Roundup). The acceptance of GM wheat is controversial. Of relevance in this commentary, both Brazil and Argentina allow GM wheat to be grown and consumed. The US has declared that GM wheat is safe for consumption, but does not allow it to be grown here. The reason for that ban is that mills that grind wheat would have to have completely separate facilities for non-GM (often labeled organic, but that has a different, legal definition in the US) and GM wheat because there is a significant stigma against GM wheat. That would increase the cost of all flour substantially. So, even though GM flour is legal to use in the US, the result is that there is no GM flour here. The US is not alone in that stance. Most of the EU prohibits GM food, in whole or in part. So, what happens to the global distribution of wheat as Brazil grows more of it for itself? There is very little wheat that would come to the US from Brazil (or Argentina), because the US grows more than enough wheat for itself. The direct impact of Brazilian wheat in the US will thus be minimal. But some countries will want only non-GM wheat, and others will accept GM wheat. The non-GM wheat will grow more expensive, since it usually has a lower yield and requires more aggressive protection. Global GM wheat production will increase as Brazil continues to grow more. The GM market will likely end up expanding as more countries begin accepting what appears to be equivalent, but cheaper, GM wheat. For the immediate future, wheat futures will still be tied to weather patterns, but in the more distant future, a split in the wheat market is quite possible. |