Traditionally, the Russian wheat sector attracts attention of not only market operators and importers, but also the authorities. We can talk a lot about timeliness and accuracy of the measures taken by the Government to control operations in the reporting market segment in the current season, but the decisions were already made, and they formed the resulting market conditions. The current article focuses on the first results of 2015/16 MY, the price situation on the domestic and export markets, as well as forecasts for short-term prospect, etc.
Domestic market: factors, conditions, prices
On threshold of the beginning of the season, many market operators agreed that due to relatively high grain prices in 2014/15 MY, they should not expect for traditional sharp decline of wheat prices during the harvesting campaign in 2015, and in the post-harvest period. Undoubtedly, the foreign exchange market conditions also provided its significant support for stabilization of the price situation. Calm periods suddenly gave way to sharp devaluation of RUR against USD, but then the national currency quickly returned its positions. In such conditions, agrarians offered the grain on the market in rather inactive way, and were not prepared to decrease their prices. And buyers, in turn, simply did not have the opportunity to lower the bid prices, as they required urgent replenishment of their raw materials stocks. So, in July of 2015/16 MY, the bid prices for new crop milling (3-, 4-grade) and feed wheat in the Southern region varied within 9`200-9`700 RUR/t, 8`800-9`300 RUR/t and 8`300-8`800 RUR/t CPT, respectively. At the same time, the purchasing prices somewhat reduced by 300-500 RUR/t compared with May-June of last season.
While analyzing the above mentioned prices, we should note that in the beginning of the current season, the market faced the trend that one impact factors, influencing the price situation, leveled down the other ones. For example, the indices of high yield and harvest volumes were "overshadowed" with the wheat qualitative indices. If in 2014/15 MY, the share of milling wheat dominated in the general structure of wheat production, then in 2015, feed wheat share reached almost 65%, due to unfavorable weather conditions during the harvesting campaign. Low demand from export-oriented companies, due to rather long period of revision of the export duties, was offset by gradual increasing of the demand from grain processing companies, etc. As a result, the breaking point, namely the decline of grain prices, did not happen at all. And in mid-September, in most regions of the country the purchasing price increased by nearly 800-1000 RUR/t.
In 2015/16 MY, the public intervention fund finally took the former position of the regulatory body of the market segment. As a reminder, last season agrarians were not ready to sell wheat on the intervention exchange market even after the December increasing of prices. In fact, last season grain purchasing operations were aborted, and the strategic reserves were not formed. Market, namely the buyers, were ready to offer the higher prices to agrarians, and nobody hurried to sell wheat to the public fund, and the intervention prices failed to make any significant impact at the reporting market sector.
But increasing of the intervention purchasing prices in October 2015 surely supported the further growing of prices, since the list of potential buyers of wheat from agrarians got another fairly strong competitor. The Government revised its calculation of the export duties, and traders gradually started increasing their purchasing activities, and were ready to show higher bid prices compared with grain processors.
Thus, as of October 30 the average purchasing prices for 3-, 4-grade and feed wheat in the European part of the country varied within 10`700-11`500 RUR/t, 10`100-10`500 RUR/t and 9`500-10`000 RUR/t CPT, respectively.
Export market: working in terms of the export duties
In 2015/16 MY, the export duties on wheat became one of the factors influencing the work rates of the export and domestic markets. As a reminder, the duties came into effect since July 1, 2015, and its rate totaled 50% of the customs value minus 5`500 RUR/t, but not less than 50 RUR/t. However, poorly specified conditions of the customs duties led to the fact that traders slowed down signing of new contracts, and some export-oriented companies preferred shipping grain crops, which were not subject to the customs duties. In addition, the situation on the world and domestic markets did not contribute to activation of trading activities of export-oriented companies.
In the beginning of the season, the offer prices for milling wheat with 12.5% protein content varied within the ranges of 190-193 USD/t and 160-162 USD/t FOB (Black Sea and Azov Sea ports), respectively. However, taking into account the bearish trend on the world market, in September 2015 the offer prices for 12.5% milling wheat fell to 178-181 USD/t and 158-160 USD/t FOB (deep-sea ports and Azov Sea ports).
At the same time, rather stable demand for the grain, as well as the global market conditions, contributed to gradual increasing of the offer prices for milling wheat by export-oriented companies. Thus, as of October 30 the offer prices for 12.5% milling wheat varied within 195-200 USD/t and 172-175 USD/t FOB (deep-sea ports and Azov Sea ports). In turn, a new formula of calculation of the customs duties (50% of the customs value minus 6`500 RUR/t, but not less than 10 RUR/t), which entered into force since October 1, and relatively stable situation on the foreign exchange market and the domestic market allowed to export-oriented companies to increase the supplies of milling wheat on the global market.
Representative of an export-oriented company from Rostov oblast commented the situation: "Summing up the first balances of work of the export wheat market in the current season, I can say that the domestic factors provided the major influence on its work. First of all, the customs duties, which significantly corrected the behavior of market participants, as well as their plan of activities. The second important factor is the foreign currency fluctuations, which were complicated with forecasts of possible grain sales, in particular from agricultural producers. In addition, I should note the intervention purchasing prices, which kept the market in suspense for a long period, because they were not declared at all. To date, many farmers use the reporting levels as the guideline of their expectations, which also somewhat complicates selling of wheat on foreign markets. As for external factors, I should note a significant correlation between the FOB prices of Russian wheat, and the prices on world markets. Therefore, taking into account the global trends, the prices of Russian wheat started reducing.
In future, the domestic market conditions and prices of the world market will provide the major influence on development of the export market of Russian wheat."
Also, the price situation on the domestic market developed in disfavour of traders. Foreign currency fluctuations resulted in the fact that agrarians held back selling of large-scale grain lots. Therefore, export-oriented companies had to gradually increase the bid prices for wheat to attract the required grain volumes. We should note that in the beginning of the season the bid prices for 12.5% milling wheat varied within the range of 10`300-10`500 RUR/t and 9`600-9`900 RUR/t CPT-port (Black Sea and Azov Sea ports). However, in the beginning of September 2015 the purchasing prices reached 11`000-11`400 RUR/t and 10`500-11`200 RUR/t CPT-port (Black Sea and Azov Sea ports), respectively. At the same time, in terms of the growth of purchasing prices for wheat on the domestic market, the customs duty rates also increased.
As a result, the situation led to some reduction of the grain supply on foreign markets in the beginning of the season. Therefore, the Government announced possible revision of the mechanism for calculating of the export duties, to activate wheat supplying rates on the world markets. However, adoption of the decision was somewhat delayed, and the intrigue concerning the new customs duties slowed down work of traders.
At the same time, expecting for the following acceptance of the new customs duties, traders gradually increased purchases of wheat stocks, and started increasing the prices in order to attract large-scale grain lots. As of October 5, 2015, the purchasing prices for 12.5% milling wheat reached 11`500-11`700 RUR/t and 11`300-11`500 RUR/t CPT-port (deep-sea ports, and Azov Sea ports), respectively. After forming of the required wheat stocks, export-oriented companies almost did not change their bid prices.
But a new round of RUR/USD devaluation in late October resulted in increasing of the purchasing prices for wheat on the domestic market. As of October 30, the bid prices for 12.5% milling wheat were declared within the range of 11`800-12`100 and 11`200-11`600 RUR/t CPT-port (Black Sea and Azov Sea ports), respectively.
Prospects
While summarizing the interim results of both domestic and export market sectors in the first half of 2015/16 MY, we should note the following factors which had a key influence on formation of prices and trading/ purchasing rates:
- situation on the foreign currency market;
- high level of competition on the domestic market;
- customs duties and global market conditions;
- intervention trading.
Despite the fact that market operators are not ready to forecast further development of the price situation, the fact that there are no required terms for reduction of prices on the market is quite obvious. And taking into account that the Government is considering to cancel the duties, then export-oriented companies will be able significantly increase grain shipments, which, in turn, will lead to the growth of prices on the wheat market.
Alexandrina Ovdienko, Natalia Stupaeva, APK-Inform Agency
