The difficult situation which is observed on the Russian market of wheat during the autumn period, became even more tense after a series of news relating to possible export limitations by the official representatives at the end of November 2014. Of course, many participants of the domestic market, including grain processors and livestock producers, were quite optimistic, despite the limited number of grain offers, and the continued growth of grain prices. However, export-oriented companies had rather continent reaction.
So, first we should list the key news which so ambiguously affected the market:
- November 28 /TASS Russia New Agency / Rosselkhoznadzor tightened the requirements for the qualitative indices of exported grains, according to the source.
- "We can cut issuance of the certificates for grain exports by one third, as will be forced to deny issuance of the phytosanitary documents for grain which does not meet the requirements," - said Alexander Isaev, Head of the TASS pest surveillance, seed and grain quality control at Rosselkhoznadzor.
- November 29 /TASS Russia New Agency / Rosselkhoznadzor appealed to the Ministry of Agriculture to ban grain exports through offshore countries, said Sergei Dankvert, Head of the department.
- "We are discussing formation of the legislative instrument which would approve: if you signed the contract with Switzerland for the supply of grains – you would get the phytosanitary certificate for Switzerland, signed the contract with Morocco - get for Morocco," - said the official.
Opinions of the market participants
Agrarians of the Southern Federal District
"We faced rather calmly the news flow on the possible limitation of exports, which in November appeared on the market. The recent growth of the offer prices for wheat was caused not only by the high demand for it, and the steady export rates, but also rather unstable situation on the foreign exchange market. The situation will stabilize only, if the RUR devaluation stops. Agricultural commodity producers, and all other market operators, are always dependent on the market conditions. To date it means that even if the exporters leave the domestic market due to any possible limitations, we will not make any price discounts. We still have a half of the season ahead, and it is not clear whether the RUR/USD rates to strengthen or not, so let's wait. And in February we will decide at what price to sell the remaining volumes of stocked grains."
"We noted that the raising issues by the media on possible limitations of grain exports, imposition of customs duties, the grain supply to Iran, etc., led to increasing of demand for the crop. Previously, the situation on the market was poorly forecasted, due to the constant worsening of the RUR/USD rates, and in late November - early December it become completely unpredictable. Grain exporters tried to purchase and sell the maximum volumes of crops, while they had any opportunity. In turn, grain processors tried to form grain stocks for the long-term outlook, working in terms of the constant price rising. The competition rates escalated, due to the news and their rebutting. It is on hand for us, it will be the planting campaign in the spring, partial replanting of winter crops, therefore we should not lose our money in terms of the constant rise of prices for materials and equipment. In the future we will primarily focus on the foreign exchange market, we have sufficient capacities for grain storage, and qualitative indices of wheat will be high in the spring."
Grain processors of the European part of the country
"The autumn situation on the wheat market was difficult to explain. In theory, the negative impact of the unstable foreign exchange rates should have been at least partially offset by the record levels of grain production. But it did not happen, and many market participants faced the reasonable questions. Even in terms of the active exports, such supply shortage is difficult to explain. If we are talking about our relation to possible export limitations, I will not hide - every man for himself on the market. First, it is to stabilize the RUR/USD exchange rate, because the factor heavily influences the market."
"The impact of exporters on the price situation on the domestic market has always been significant enough. Some positive trends will appear on the domestic market. Agricultural producers still have grain stocks, and weakening of demand will result in increasing the number of grain offers which will stabilize the price situation. In recent days, it is the problem to buy grain for any price, not only the price situation. The situation of some previous years repeats, when the wheat for agrarians became priceless, due to the high demand, and they were not prepared to sell the grain. For the average consumer the situation looks illogical and annoys, when it is first blown on the record harvest, and then the price of bread increases. Naturally, one needs to do something about it, and eventually someone will lose. But to protect the consumer and stop the prices rising - it is the primary task."
Exporters
"The export market anxiously reacted to the news about the limitations. On the one hand, nothing followed behind them yet, but on the other hand it caused the certain straining. I do not think that the extremely high rates of export shipments became the major reason for the price rising on the domestic market. In terms of the announced harvest volumes, increasing of the export rates would not provide such negative impact on the domestic market. Agrarians increased the selling prices, as far as the situation on the foreign exchange market develops and no more. And imposition of any limitations - it is just an attempt to weaken the position of exporters, and there is a fairly strong lobby from the grain processing sector. If we talk about offshore markets, the first thing I want to ask why the grain segment only? Also, the petroleum market is working on a similar basis, but nobody touches them... Unfortunately, grain exporters have a lot of similar questions."
"The possible export limitations are caused by the fact that the Government wants to keep the grain stocks for domestic consumption. Since the country has the unstable economic situation, the reduction of wheat exports may contribute to the lowering of price rising for bread and bakery products. But as far as we know, the Government moved the discussion of the duties imposition until March 2015, which we appreciate as the positive factor."
Analysis of the price situation in the domestic market
The price dynamics is the most indicative market reaction to the above mentioned news. Since the end of October there was observed the trend of price rising for grains by nearly 600 RUR/t per week, and in November and early December it remained unchanged. So, as of December 12 in the European part of the country the bid prices for milling wheat varied within 11000-12200 RUR/t CPT. The selling prices varied within 11200-12500 RUR/t EXW. In the Azov and Black Seas ports on the CPT-port basis the price for wheat with 12.5% protein content increased to 12000-12200 RUR/t and 13000-13500 RUR/t. Due to the RUR devaluation, grain holders thought it appropriate to slow down grain sales, while increasing the selling prices. In order to attract more grain offers, companies-processors continued rising their bid prices. In turn, exporters often increased the rates of grain purchasing, and were forced to raise their bid prices.
Market information
In the current season APK-Inform Agency estimated wheat production in Russia at the level of 58-59 mln tonnes in clean weight, against 52.1 mln tonnes in the previous season. Taking into account the carry-over stocks, which are estimated at 3.2 mln tonnes, the total supply of wheat in the season-2014/15 may reach 62.2 mln tonnes (up 12% compared with 2013/14 MY). The domestic consumption of wheat in the current season is estimated at 34-35 mln tonnes.
Thus, the export potential in 2014/15 MY is estimated at 23 mln tonnes of wheat, which will be a new export record per season (the current record - 21.2 mln tonnes in 2011/12 MY).
According to the customs statistics, in July-October of 2014/15 MY Russia supplied 12.3 mln tonnes of wheat on foreign markets (up 33% compared with the corresponding period of 2013/14 MY), which became the maximum value of exports for the period. It should be noted that the reporting volume reached 54% of the forecasted export potential for the current season.
Market experts opinions
Vladimir Petrychenko, General Director of ProZerno LLC
“Since mid-November the grain market of Russia had no other way of development, except of the bullish trend. Moreover, the potential of growth is not exhausted yet. To date the weekly devaluation rate of the RUR are reaching 10%, while the RUR prices for grain products are growing every week by nearly 5%, i.e., slightly behind the devaluation rates. The reporting backlog guarantees the growth of RUR prices in the short term outlook.
In such situation the desire of agrarians to limit grain sales can be called as quite standard reaction. Moreover, such policy is both tactically and strategically justified. For example, by the time to realize top dressing of winter crops or spring planting works, agricultural producers will face with 30-50% price rise for the required materials (seeds, fertilizers, plant protecting agents, fuels, etc.). But we can see the potential for worsening of grain qualitative indices, due to problems with its storage, but this risk is leveled by the fact that the prices for feed grains on the Russian market are also growing, as well as milling grain prices.
Can the Government, using its existing mechanisms, to stabilize the current price situation? Any action by such major market participant, is not likely to be able to reach the result, except for normalization of the foreign economic environment (stabilization of the exchange rate, provision of the required credit policy). All other possible measures will play provide negative impact only.”
Alexander Korbut, Vice-President of the Russian Grain Union
“It is somehow difficult to talk about appropriateness of the tariff or administrative limitations on exports in terms of the harvest at 104 mln tonnes of grains in clean weight. We should say that to date the market is waiting, and Russian exporters will expect for solution of the market situation. The world market has already reacted at the statement of Sergei Dankvert, Head of Rosselkhoznadzor, about possible limitations on the exports of Russian grains, but then in terms of the absence of real actions, it calmed down.
Russia is part of the global grain market, and changes of the RUR/USD rates naturally affected the export prices, which, in turn, pulled the grain prices on the domestic market.”
- At the same time, Russia will not impose the ban on grain exports, declared Nikolai Fedorov, Minister of Agriculture of the Russian Federation, on December 11. At the same time, he called the upward trend in grain exports as quite "alarm". Fedorov added that the Ministry plans to consider all variants to contain foreign supplies of grains, except for the export ban.
Alexandrina Ovdienko, APK-Inform
