Russian grain market at the edge of the seasons — pending drive…

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APK-Inform

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 ince 2016 Russia continued increasing the production of grains to the maximum acting as a driver for the Black Sea region market development and pushing the global market. The grain season-2017/18 brought new records in terms of both the grains production and export. However, there are always two sides of the same coin. 2017/18 MY heritage for market participants and the prospects for 2018/19 MY became the main topics of our interview with the Director at the analytical center SovEcon, Andrei Sizov.

 

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- Andrei, the record season-2017/18 has been finished. What features apart from the record crop could You stress?

The high production in 2017 was of course the main feature of the season. Despite the fact, that the preliminary prospects were quite optimistic (since the end of 2016 we forecasted the crop to reach 70 mln tonnes, the second level at the history), nobody ever imagined the final figure to be so high. If we speak on the regional basis, the results in the Volga region was the main surprise as the production forecasts there have been increasing most remarkably. After the first figures at the end of the harvest we have got the new surprise as the results of the wheat harvest appeared 1 mln tonnes more from the previously expected. Still, the biggest surprise was to harvest the record crop this season.

Moreover, according to our estimates, the export volume of grains and pulses in 2017/18 MY will surpass 54 mln tonnes. To compare: in the beginning of the season the estimations were considerably lower – 40 mln tonnes, due to the restrictions of the export infrastructure. For example, since September of 2017 we forecasted the export at the level of 44 mln tonnes, considering the estimations of the production level, but the results reached 54 mln tonnes.

The second surprise was the export infrastructure and the Russian logistical system in general being able to transfer such volumes of grains.

We have shipped great volumes but of course, we were not able to realize the export potential of 60 mln tonnes, as the capacities are limited.

In general, it was an outstanding season for the grain companies, terminals and the carriers. They received a good income apart from the agriproducers.

 

- Russia actually was setting a pace, and was the major driver for the Black Sea region market. The main producing countries became “worried”. What were the tendencies on the Russian grain market at the end of the season?

When someone significantly increases the share on the market everybody else become “worried”. It is natural that nor France, nor Ukraine neither the US feel comfortable about this situation.

By the end of the season we are reaching the record stocks for the last several years, that can offset the possible low harvest in the future season. In general, we estimate the grain stocks at the level of 23 mln tonnes and the total supply – at 142 mln tonnes in comparison with 156 mln tonnes year-on-year.

In should be considered that the stocks are unevenly distributed around the country, in particular, they are lower in the north Caucasus whereas larger in the Volga region.

 

- Despite the series of record crops and the lack of the grain storages (the majority of which are stocked by the crop of 2014/15 MY), the interventions were not realized in 2017/18 MY. Is it possible that the no-intervention practice will become regular?

If we speak about the interventions, I believe the conditions have changed as there were no purchasing interventions. However, this issue is a question to the officials. I can say that the budget has less finance for the storage of grains in comparison with the volume of grains. I would assume that since the start of the new season the government will be a seller but nor the buyer of the grain. Moreover, different officials start to outline the idea that the interventions are not affective. Basically, we were saying it at least last 10 years.

There are no severe deficiencies in the storages in the current season as well as during the previous years.

 

- In 2017/18 MY, in terms of the record exports of wheat there was formally zero import tax that is going to be prolonged in 2018/19 MY. Why is it not rejected eventually?

To reject or not to reject is again a question to the officials. If the officials will decide to abandon it then they will have to change something which is awkward.  So, they decided to leave it. But, this might be the detrimental factor for both the exporter and the producer. It is rather strange that the interventions still exist as Russia announced to continue increasing the export of commodities and the grain is a leader among them. Such announcement has become the Russian government strategic target – to increase the export of the agricultural products from $20.7 billion to $45 billion in 6 years. And when it is said that the country must bump up the exports, the existence of the import tax is surprising. I hope, it will be eliminated soon.

 

- Is the export market of wheat flour going to change somehow in terms of the high crops in the nearest years?

I think, there is not going to be any significant changes. The market is small and the positions of the main players have been settled. It is impossible to move Turkey and Kazakhstan from their positions due to their geographic location and the governmental support.

 

- Do You believe that Russia will remain the leading exporter in the new season? What will be the main distribution channels, and is there going to be any changes in the geography of exports?

According to our June forecasts the export of grains and pulses in the new season will be high – around 47 mln tonnes, and 37 mln tonnes of wheat. The geography of exports is not going to change significantly – Egypt and Turkey will stay the main importers. Last season Egypt was the main buyer too, that notably increased the import. If we speak about the export of wheat solely, Bangladesh moved to 4th place, but it still remains an important export direction. Vietnam moved to 3rd place. In particular, in 2016/17 MY Vietnam was the main buyer of corn and in 2017/18 MY – of wheat. At the same time Indonesia has substantially raised the imports and became the 2nd largest buyer of wheat after Egypt.

In general, I would rather say, there in an increase of the importance of the Asian market, that usually purchase the food wheat of high quality. This market is relatively new for Russia and the country is competing with Australia and Ukraine in terms of exporting the uncommon wheat – not standard wheat with 12.5% protein content, but the low protein which appeared as the result of the high crops.

 

- This year, the weather conditions boosted the extensive discussions of the future crop in 2018. To what extend do the numbers vary, and how will the planting campaign in the Siberian region influence at the general harvest?

I am working in this area for more than 20 years and I do not remember such active and sometimes fierce discussions regarding the new Russian crop prospects. From the very start we were quite optimistic but last months we are lowering our forecasts. Thus, the last one was 72.5 mln tonnes. The main reason is the insufficient sowings of wheat in the Siberian region where the planting area decreased by 0.7 mln ha year-on-year due to the bad weather.

Herewith, the other wheat output prospects vary at the level of 60-65 mln tonnes and even less, thus our forecast is the super optimistic.

In the other regions in the world the new crops estimations are rather clear, whereas in Russia and in Ukraine not. These countries play an important role on the global scene. Roughly speaking, the new relatively high production level in this region – 70 mln tonnes in Russian and 25 mln tonnes in Ukraine, can mean that the bear market will preserve. At the same time, moderate wheat output due to the “Black Sea drought”, feared by many analytics and traders, means the desirable and satisfying bull trend.

 

- Last season, Russian traders faced some logistical problems (lack of the storage capacities, grain-cars, etc.). How do You estimate the conditions and the possibilities of the agrilogystical system in general? What problems may occur in the new season?

The problems the exporters faced last season were not solved. First I would mention that the port infrastructure was able to ship much more grain than expected. At the end of 2017/18 MY all of the terminals will make a fortune, which in turn might contribute to the new investments flow in the area. In the mid-term perspective we will see the widening of the terminal capacities by more than 10 mln tonnes, the lack of which is the main constraint. I suppose, that if we had more terminals and sea ports, the lack of grain-cars would not have been a crucial issue.

If we speak about the shortage of the grain storage tanks the issue was partially exaggerated. There were no fundamental difficulties during the season, only sometimes at the end of the harvest there was not enough storages. For the last decade Russia widens the grain storage capacities and nobody actually counted the number of the of-the-floor storages on farms. Moreover, I believe that the 2017/18 MY will give a spur for the further extension of the cheap technology of storing the grains in silo bags.

The exportes have already faced the problems of 2018/19 MY. The tariffs of the shipping noticeably increased, the quotas on the terminals were drastically changed. Some of the traditional market participants got less and some new ones got more.

I will assume that probably closer to the second half of the season the hype surrounding the terminals access will calm down and the part of the quotas will be redistributed. Based on the grain supply decrease in the current season, not all of the ambitious plans might come true.

 

- How do You estimate the effectiveness of the program of the transporting costs compensations for the port remote regions?

It is not effective as well as the interventions. If there is some uncompetitive region in terms of wheat production, then why would it need the subsidies and the artificial support? There is no reason. For example, in the beginning of the last season the Siberian region declared the glut of the wheat market, then the government gave the transport subsidies and the one of the governor said that the region would produce more.

The main advantage of the system in comparison with the interventions is that there are no extra limitations. The government gives the subsidies and that’s it, whereas the interventional wheat needs storage, warranty and funds freeze.

In general, the measure is largely ineffective. I hope, the officials will agree with us earlier than with the interventions refusal which we criticized for decade.

 

- Please, identify the main factors (global and the regional) that in Your opinion would affect the market tendencies in the new season.

The factors are actually the same: the demand, the supply, the stocks, and the infrastructure. There are no fundamental changes. The trade wars with a motion to the President Donald Tramp does not really interfere with the Black Sea region. The one aspect that may influence the market is the demand growth on the Ukrainian corn from China which is advantageous for the Russian corn prices too. (The direct delivery of Russian corn to China is possible via the Far Eastern Federal District).

 

- To what extend does the price volatility affect the market?

We have run through the 2014/15 MY with the double devaluation and we will do the same in terms of the current exchange rate fluctuation amounting to +/- 15%. In the short-term perspective the ruble, as well as the other currencies of the developing countries, might decrease which in turn can increase the competitiveness of the Russian wheat. However, this is not going to fundamentally change the overall picture.

 

Interviewed by Elena Cherednichenko, APK-Inform Agency

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