Ukraine has worked a minor miracle in placing all that corn: results of the first half of the season-2018/19 — Atria Brokers

Despite the fact that Ukraine collected a record corn crop in 2018/19 MY, prices could not be considered unattractive this season. Nature is an amazing factor, played the main part in the first part of Marlezonsky ballet. Who knows what would have happened if there was no drought in July-August 2018, which forced importers to buy panically corn for half a year ahead. Christina Serebryakova, Head of Analytical Department and Broker at Atria Brokers shared her opinion on the peculiarities of the first half of the year in the Ukrainian corn market in 2018/19.

— According to official data, in the first half of the season 2018/19 (October - March) Ukraine exported a record 18.6 mln tonnes of corn. This is already 70% higher than the volume of shipments for the same period last year (10.93 mln tonnes). What factor do you think played a major role in shaping such a trend?

The ground for high exports of Ukrainian corn in the first half of the season was laid back in August 2018. At that time, worries about a decrease in grain crops in Europe and the Black Sea due to drought prompted operators to buy Ukrainian corn as a cheaper alternative to feed wheat with delivery until January-February. By mid-August, the price of corn for the new crop had risen to nearly 197-200 USD/t with delivery in November. In August, a duty of 4 pesos per dollar on Argentine corn was introduced, which should have contributed to sales of Ukrainian corn since September.

— At the end of October 2018, the price of Ukrainian corn reached its minimum of nearly 163-164 USD/t FOB deep-water ports. Apart from the progression of the local harvesting campaign, what put pressure on the market?

It is worth noting that September was marked by low prices on competition with the United States for the Middle East, North Africa and Asia. The large corn harvest in the United States, as well as the reluctance of American farmers to sell soybeans cheaply, forced them to switch to corn sales. The low price of American corn, combined with attractive transatlantic freight, provided strong competition in traditional Ukrainian directions.

Prices declined throughout October and hit bottom at the end of that month. Several factors played a role. Firstly, if in early October there was a high interest for Ukrainian corn with November shipment, later it faded. There was no interest from Turkey and Egypt. The latter, in turn, switched to American corn. In contrast to the previous seasons, a large crop of American corn continued to be actively shipped between September and November 2018. In addition, Brazilian corn was also actively present in the markets. Also, as the harvesting campaign in Ukraine progressed, it became clear that we were dealing with a record harvest, which would be nearly 36 mln tonnes, and according to rumors — even 38 mln tonnes. The lack of storage capacity and lack of interest from buyers due to good demand coverage in Spain (which also showed an active interest in Brazilian corn) and Egypt “crushed” prices.

In early November, there appeared interest from South Korea with delivery in February amid declining shipments from Brazil, which concentrated on the supply of soybeans to China. At the same time, Ukrainian corn was offered to South Korea at a discount of nearly 5 USD/t compared with its competitors Brazil and the United States, against the background of a larger number of broken grains and dust impurities.

Egyptian demand was also low in December-January due to the closure of poultry farms for the winter period, the switch to import of frozen poultry, as well as high stocks inside the country. In January, Egypt’s demand recovered, but Brazilian corn accounted for a fairly large proportion of purchases, despite the fact that Brazil’s export window usually closes in January. One of the reasons for the continued supply of Brazilian origin was the lack of supply of Argentine corn, an Egyptian favorite due to quality parameters.

— For the second straight year prices for Ukrainian corn soar in the winter. Which factor contributes to such a trend?

As it was expected, over the last week of January, prices skyrocketed against the demand from the Middle East, North Africa and Asia due to depletion of stocks over the New Year holidays. Buyers stepped up contracts for delivery in March, taught last year’s experience, when logistical problems with a shortage of railway cars in Ukraine led to an increase in corn prices in January 2018 by 11 USD per month. TMO ‘s tender on January 18, 2019 for delivery in February-March was marked by the purchase of 342 thsd tonnes of mainly Ukrainian corn. In January, the Ukrainian corn was most likely contracted to Iran for delivery in March-April. Perhaps, partly, under the tender of the state food procurement agency of Iran, SLAL, under which 60,000 tonnes of corn were procured out of 200,000 tonnes announced for purchase. Due to these factors, on February 2, the cost of corn reached its “second” peak in this season at a rate of 185 USD/t — the highest point after reaching 197-200 USD/t in August 2018. From October to February, the price increased by nearly 20 USD/t, practically reflecting the trend of last year. There were expectations that prices could reach a new record against August 2018.

During this period, sales to China, which prefers non-GM grain, were quite large. In general, sales in this direction were expected by operators at a high level due to several factors. First, on July 6, China imposed a 25% import duty on American corn. By coincidence, this matched with a period of traditional decline in exports of American corn. Secondly, on October 26, the requirement for minimum protein content in animal feed for pig and poultry was reduced by 1.5% in China, which should also lead to an increase in interest for corn. However, then the scale of African swine fever put an end to the prospects of sales increase. The USDA still sees corn imports to China in 2018/19 MY at the level of 5 mln tonnes compared to 3.46 mln tonnes a season earlier. At the same time, since January 2019, information appeared regarding the negotiations between the United States and China, and in the middle of March, there were rumors that China could buy up to 3 mln tonnes of American corn, which did not receive confirmation. This volume is very impressive, considering the fact that the total import of corn to China in 2018/19 MY is predicted by the USDA at the level of 5 mln tonnes, and the export of American corn to China did not exceed 1 mln tonnes from 2013/14 MY. Despite the latter, in the period from October to March 2018/19, the export of Ukrainian corn to China amounted to an impressive 2.28 mln tonnes, + 58% year on year.

— What prevented Ukrainian corn prices from repeating last year’s spike?

Procurement activity has weakened, China has gone into a long period of celebrating the Chinese new year (approximately from January 25 to February 10), which, combined with the bearish February USDA (voiced expectations of a record corn harvest in Argentina, which promised to enter the market earlier than the traditional April) led to the fact that over the next 45 days, the cost of supply of Ukrainian corn decreased by nearly 15 USD/t and amounted nearly 171 USD/t as of March 16. The traditional export window of Ukrainian corn, from January to early April, has decreased due to the early start of harvesting of Argentinean corn crop, expected by market participants at a record level of 36-38 mln tonnes. Before the sowing campaign there was a surge in sales of Ukrainian corn at low prices, because farmers needed working capital for spring field works. The prospects for exports to China were overshadowed by China’s negotiations with the United States. The premium that China was willing to pay for Ukrainian corn was nearly 1 USD, which did not attract Ukrainian operators.

After mid-March, the price strengthened, the pressure of the South American harvest seemed already taken into account in the price, plus, hopes of interest from China and the EU reappeared. From July 1, 2018 to April 8, imports of Ukrainian corn to the EU reached a record 11.7 mln tonnes, + 62% per year, which so far shows a big lead over Brazil (3.93 mln tonnes), whose supplies should increase with the release of the new crop in June-July 2019. In general, the fact that the last few reports in a row, the USDA raises the forecast for corn imports to the EU, in the latest release to a record 24 mln tonnes, is the main fundamental factor supporting prices this season. The USDA in the April report raised its forecast for corn exports from Ukraine in 2018/19 by 0.5 mln tonnes per month to a record 29.5 mln tonnes against 18.04 mln tonnes a season earlier. At the same time, the export forecasts for Argentina and Brazil were also increased by 0.5 mln tonnes and 2 mln tonnes — to 30.5 mln tonnes and 31 mln tonnes, which along with the United States as the leader in deliveries of this grain, 58.42 mln tonnes, was the factor that kicked Ukraine out the TOP-3 world exporters of corn in 2018/19.

— Despite the pressure of the Argentine factor, on which factors Ukrainian prices survived in March-April?

From February-March 2019, rumors were spread about the lack of corn on the Indian market and the need to import up to 2 mln tonnes of corn there. Indian summer corn crop was devastated by drought and the armyworm infestation. The market expects the harvest to be nearly 16 mln tonnes, but the official estimate so far exceeds 20 mln tonnes. The last time, India imported corn in 2016, when it was delivered 181 thsd tonnes of corn within the framework of tariff quotas. On February 10, the first ship (Spring Cosmos) with Ukrainian corn had sailed to India on the eve of the start of local harvesting in March. It appeared even before the introduction of fresh tariff rate quotas. In general, market operators reported that India imported nearly 100 thsd tonnes of Ukrainian corn at 60% of import duty, and only on April 3, 2019 the government agreed on a quota for import of 100 thsd tonnes of non-GM corn with 15% of import duty. But only poultry producers and starch manufacturers could import within those quotas. Since India imports only non-GM maize, it can consider Ukraine and South Africa as sources. In addition to the specified volume, the approval of imports of 400 thsd tonnes of corn is still expected in India. So far this volume is much less than the import needs of the country, which according to rumors of Indian market operators amount to nearly 1.5-2 mln tonnes.

Apart from Indian "passions", Turkish tenders also lend support. On March 12, 2019, Turkey’s state grain importer TMO purchased 300 thsd tonnes of mainly Ukrainian corn for March 25-May 13 delivery. Another TMO tender for the purchase of 300 thsd tonnes of corn for May 13-June 2 took place on April 24. Together with 342 thsd tonnes of corn purchased by TMO on January 18, the total volume contracted within the framework of these tenders reached 942 thsd tonnes. Recall that on August 14, Turkey allocated TMO import quotas of 700 thsd tonnes of corn at zero import duty until July 31, 2019. And in mid-January, quotas on imports of another 700 thsd tonnes of corn were allocated. Prior to the allocation of quotas, the duty on corn imports to Turkey was 25%. In May 2019, USDA forecast an increase in corn imports to Turkey in 2019/20 by 500 thsd tonnes per year — to 2.7 mln tonnes due to an increase in demand from the feed industry.

In addition, at the end of March and in the first half of April, corn prices were supported by the restraint of sales by farmers who focused on the spring sowing campaign.

— How will Ukraine cope with large corn stocks in the second half of the season?

Supplies of corn from Ukraine to the world market in the first half of the season amounted to 18.6 mln tonnes. In order to achieve the forecast of exports expected by the USDA in 2018/19 MY at the level of 29.5 mln tonnes, monthly shipments in the second half of the season should be nearly 1.8 mln tonnes. In the first half of April, farmers were not ready to sell cheaply, the gap between buyers and sellers was often more than 5 USD/t. However, since the second half of April there has been a downward trend, as the trade witnessed new South American crop forecasts. On April 17, Argentina harvested 23.3% of corn, the government announced a forecast of corn harvest in the country in 2018/19 MY at the level of 55 mln tonnes, including non-commercial grain. At the same time, market expectations were at the level of a record 50 mln tonnes. For Brazilian corn, prospects for 2018/19 also look record at up to 100 mln tonnes. If these figures are confirmed, the market will feel strong pressure at the end of spring — in the summer of 2019. Of course, Ukrainian farmers can still hope that the USDA June report on US corn stocks will show how much grain was actually lost during floods in the US in spring 2019 and this may limit price losses for a while; as well as US corn planting campaign delay could cut both yield and acreage prospects. At the same time, the final redistribution of American wheat-corn-soybean acreage, as well as further crop development in the United States and Ukraine will also be in the focus of operators. One thing is clear for now — corn stocks are sufficient to maintain Ukrainian exports at a high level.

Interviewed by Anna Tanskaya, APK-Inform Agency