Milling wheat prices increase in Ukraine - main factors and deplorable results

Source

APK-Inform

2143

Since the beginning of 2014/15 MY, the prices growth has been the main tendency on the wheat Ukrainian market. However, in November 2014, the prices actively increased which caused the by-products prices rise. Thus, the processing and export-oriented enterprises faced difficulties to carry on their commercial activity. The reporting article to tell about factors, which influenced the market.

Raw materials market: the prices increase and supply shortage

The difficult political and economic situation in the country caused the prices rise for many agricultural commodities, especially the wheat prices, which increased by 25% in the beginning of the season and continue to grow.

Grain holders

Since the beginning of 2014/15 MY, the heavy-tonnage batches supply on the milling wheat market has decreased. The agrarians realized the grain small batches in order to finance the working capital. This fact was determined by next factors: the relatively slight share of milling wheat in general production (40%), unstable exchange market and buyers’ high demand. Despite the processers and exporters demand prices increase, the agrarians preferred to keep grains. With the prices growth, the grain became a deposit with the high interest for agrarians. Considering the combustive and lubricating materials as well material and technical resources prices increase during last 6 months, to keep high prices for grain was the only possibility for agrarians to avoid losses, to carry spring crops planting campaign and to provide the grain necessary quantity for the country.

The agrarian from Kirovohrad oblast commented the situation:

“The national currency depreciation was the main reason to increase charges for planting campaign. The agrarians depend on the production goods (plant protection products, seeds, fertilizers, spare parts for agrotechnology) delivered from abroad. The prices for stated resources depend on the foreign exchange rate. Considering this fact we can not realize the wheat with the prices required by refining and export-oriented companies. Their price is not reasonable for us, thus we are waiting for more attractive ones”.

Processing companies

The high demand, as one of the main factors to influence the pricing, contributed the prices increase in 2014/15 MY. Note, the processers increased the purchasing prices due to the limited supply of grain heavy-tonnage batches on the market. According to APK-Inform data, in the end of November 2014, the processers' purchasing prices for 2- and 3-grade wheat have achieved the record level in the recent 2 seasons. However, the price were not acceptable for agrarians, thus it is possible they will increase further. Note, the grain final cost rose due to the logistics: the processers which needed high quality wheat, purchased grain from the nearest and farthest regions as well. The processing companies could not completely compensate the charges with by-products prices increase due to the high competition on the market. Besides, the government regulation for bread prices does not permit to the bread bakers to buy wheat flour with high sales prices. According to the processers, the social bread production profitability is equal to zero under current conditions.

Vladimir Strigunov – the director of Lauffer Group commented:

“The bread making enterprise can achieve the positive profitability only if it produces the high margin commodities – the fancy and premium grade bread. Meanwhile, the Lauffer Group bakery plants produce the mass and social kind of bread with volumes stated in memorandums which were signed with the local authorities in every region of presence. Fortunately the Lauffer Group possesses the milling and oil-extracting factories, distributive network and cars fleet. Thus, we can manage the raw materials and logistic expenses and provide stable prices for bread”.

Export market

The grain active shipments for exports influenced the price situation on the domestic market. Note, in July-September 2014, the export-oriented companies purchased the grain without prices change. However, since October 2014, the exporters and processers have increased the purchasing prices due to the supply shortage. But the purchasing activity on the CPT basis was low due to the stable prices on the FOB basis (245-250 USD/t). According to the experts' forecasts, if the global market conjuncture does not change, the exporters' purchasing activity on the domestic market will decrease. Actually, the part of Ukrainian exporters stopped their purchasing activity.

 

Flour market: the consequences of grain market conjuncture negative influence

The milling wheat prices increase influenced the by-products market. In the current season, especially in October-November 2014, the milling wheat market quickly responded on the raw materials market changes. Thus, as of November 20, 2014, the supply prices for premium and 1-grade wheat flour increased which affected the final products sales (the active prices growth conducted the considerable sales decrease). According to the market operators, in November 2014, the flour realization decreased by 20-25% as opposed to the October rates, thus final products stocks increased. The millers could not decrease the prices due to the wheat prices growth. Besides, the market participants noted it is beneficial to buy flour from Agrarian founds reserves in the second half of the MY. The flour stocks decreased and the interventional flour price becomes favorable for bakers. However, in the first half of the season the flour price is higher than average. Thus, in this period it is profitable to buy the commercial flour directly from suppliers.

The processer from Kharkiv oblast stated:

If the grain prices continue to rise, we will increase the wheat flour prices, despite the bakers and other consumers’ low demand for our products. Considering the Agrarian fund unstable functioning and its possible liquidation, we can not expect the grain and flour consistent supplies from its reserves. The consumers will have to purchase the wheat flour with prices which we will fix”.

ANALYSTS' COMMENT

Andrey Kupchenko, APK-Inform analyst

In the current MY, the situation on the Ukrainian wheat market is complicated due to the agrarians preferring to hold grain sales expecting for prices further increase. It is especially actual in the current season when the production costs significantly rose. The grain low quality is another factor to influence the market. According to APK-Inform experts, in 2014, the 1-3 grade milling wheat share totals nearly 43% (10 mln tonnes). Besides, in the current season a few of milling wheat batches cannot be used for processing due to the non-conformity to the milling standards. The milling wheat share is nearly 60% of milling wheat harvested volume (6 mln tonnes). Meanwhile, in the beginning of the season the Ukrainian wheat exports was active. According to the Ministry of Agrarian Policy and Food data, as of November 20, 2014, country exported nearly 7.2 mln tonnes of wheat with the principal part of milling crops.

Thus, the limited quantity of high quality wheat in 2014 harvest, the active exports and grain restraint by the agrarians conduced to the grain limited supply and to the prices increase. Note, the exporters which purchased the wheat on the CPT-port basis, could increase the demand prices given the national currency depreciation; meanwhile the processers' activity is controlled by Government which makes them non-competitive.

 

Aleksandrina Ovdiyenko, Yulia Shatravka, APK-Inform

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