2016/17 MY became a period of renewed interest in the flour milling industry in Ukraine. It is largely due to development of the export direction and opening of new prospects. Despite the downward trend in domestic consumption and profitability of finished goods production, the Ukrainian market of flour continues developing, the companies realize various modernization of their production facilities, and the production rates continue growing.
Basic factors
Reduction in flour consumption in Ukraine during several recent years and its overproduction rates, contributed to the further reorientation of companies-producers towards export direction, and caused an increase in foreign supplies, as well as stimulated producers to find new markets.
According to the statistical and analytical figures of APK-Inform Agency, in 2016/17 MY the flour consumption for production of bakery, macaroni and confectionery goods reduced by nearly 7% compared with the previous season, due to lowering of the demand from consumers, mainly caused by a decline of the population. Despite the general 3% reduction in the domestic consumption of wheat flour in Ukraine and growing of its prime costs, APK-Inform analysts estimated the production in 2016/17 MY at 2.76 mln tonnes, against 2.6 mln tonnes in the previous season.
According to market participants, the qualitative indices of grain mainly determine the basic characteristics of flour. At the same time, high competition requires detail-oriented treatment not only towards quality, but also to the factors determining the prime cost of Ukrainian products (productive indicators and tariffs, the value of purchased raw materials, etc.). The above-mentioned factors make grain processors to look for costs lowering and optimization of the production processes, in terms of keeping of high qualitative indices of flour. As a reminder, some experts estimated the share of milling grain in the wheat harvest-2016 at nearly 50-70%. But during the season, representatives of grain processing companies did not register any significant easing in the process of purchasing of large-scale lots of wheat with milling characteristics. The situation mainly developed due to the policy of containment of grain sales by agrarians which have their own storage capacities, as well as high competition among grain buyers.
We should note that the companies which started realizing reconstruction and modernization of their old facilities and building of new large-scale and small mills, made a contribution to the further growth of production volumes of the finished goods and rising of its qualitative indices.
Also, taking into account the favourable prices for the wheat with milling characteristics, the reporting factors allowed to Ukrainian producers to hold competitive prices for their flour products during the season.
Price trends
In 2016/17 MY, the situation on the flour market generally rerun the price trends in the wheat segment, and market participants often characterized it as low-fluctuating. At the same time, the bullish trend mainly dominated on the market, and developed in more active way in the second half of the season, due to appreciation of the finished goods production. So, in the beginning of the reporting MY (July 2016) offer prices for top-grade and 1-grade flour varied within 5`100-6`300 UAH/t and 5`000-6`100 UAH/t EXW respectively, then in February-March of 2017 the prices reached 6`000-7`800 UAH/t and 5`700-7`300 UAH/t EXW respectively.
At the same time, low consumer activity put the main pressure on prices in the flour segment, and many companies had to sell the finished goods at the lower prices, and in some cases, they agreed to price discounts to promote further sales. Thus, low sales rates of the products resulted in the fact that in April-May of 2017 the price situation started moving to downwards. According to market participants, they managed to sell only small-scale volumes of flour at the prices close to the maximum level. To date, selling prices for top-grade and 1-grade flour reached the ranges of 5`700-7`500 UAH/t and 5`500-7`200 UAH/t EXW, respectively.
In turn, in the first half of 2016/17 MY the price situation on the Ukrainian export market of wheat flour remained relatively stable, and in the second half of the season the market faced diversely directed price tendencies. The demand of importers, as well as high competition rates on the foreign market and among Ukrainian export-oriented companies, became the key pricing factors. For most part of the season, offer prices for top-grade and 1-grade flour varied within the ranges of 185-210 USD/t and 175-200 USD/t FCA respectively, and rarely the prices reached the maximum values (215-220 USD/t and 205-210 USD/t FCA).
To date, most representatives of grain processing enterprises continue selling the finished goods through previously formed sales channels at rather stable prices, which often vary within the ranges of 190-210 USD/t and 180-200 USD/t FCA, respectively. At the same time, some grain processors stressed the growing demand of major importers, and started gradually raising their selling prices, which in some cases reached 215-225 USD/t and 205-215 USD/t FCA, respectively.
According to market participants, the export direction became the major factor stimulating the further development of the flour milling industry, as evidenced by the growth in export volumes and geography of Ukrainian products. According to the preliminary results of 2016/17 MY, flour supplies from Ukraine on foreign markets will break a new record at 390 thsd tonnes, against 347 thsd tonnes in the previous season. In the remaining period (July-May of 2016/17 MY), Ukraine already supplied more than 90% of the export potential on foreign markets. In addition, the growing demand from major consumers will assist in enlarging of the rates of trade and purchasing activity in the last month of the season.
Sales geography and export volumes
We should highlight relatively high demand of importers for Ukrainian wheat flour among the main positive factors contributing to the growth of exports in 2016/17 MY. Thus, during almost the whole season the market sector faced fairly high rates of trading and purchasing activities in the export sphere. In particular, in December 2016 Ukraine broke the absolute monthly record in export volumes (42.4 thsd tonnes of flour). In January-March period, Ukraine supplied nearly 93 thsd tonnes of the product on foreign markets, against 76 thsd tonnes in the same period of 2015/16 MY. Thus, in July-May of 2016/17 MY the exports of flour from Ukraine totaled 359.4 thsd tonnes, an increase of 12% compared with the same period in the previous season.
It is worth noting the increase in purchases by such countries as Somalia, which imported more than 30 thsd tonnes in July-May of 2016/17 MY, against 1.8 thsd tonnes in the whole previous season; Angola - over 28 thsd tonnes, against 7.6 thsd tonnes; the United Arab Emirates - almost 23 thsd tonnes, against 3.3 thsd tonnes; Lebanon - over 6.2 thsd tonnes, against 1.6 thsd tonnes; and Georgia - over 5.5 thsd tonnes, against 3.5 thsd tonnes.
China remained the key market for supplying of Ukrainian flour, and imported 73.5 thsd tonnes of the product in July-April period. Chinese companies mainly re-exported the product to neighbouring countries (particularly to North Korea). During several recent seasons, dependence of the Ukrainian export market of wheat flour on the key but problematic market of North Korea started gradually declining, and Ukraine somewhat substituted the reporting volumes, which can also be attributed to positive developments.
At the same time, Indonesia significantly reduced the imports of flour products by developing its own production capacities. As a result, in July-May of 2016/17 MY Ukraine supplied 2 thsd tonnes of flour products only to the country, while in the previous season Indonesia took the 6th position in the rating of countries-importers of Ukrainian flour with the import volumes at almost 23 thsd tonnes.
In the reporting season, the export volumes to the United Kingdom almost halved, and reached 818 tonnes only, against 1.4 thsd tonnes in July-May of the previous season.
As for the qualitative indices of flour products, most Ukrainian grain processors operating on the export market, noted that the figures mainly satisfied the requirements of major importers. At the same time, Turkey remained the main competitor of Ukraine in the market sector, and during many years the country successfully developed its position in the rating of global exporters of flour products. To date, Ukraine is losing to Turkey in both quality of flour and pricing policy.
The Head of the department of finished goods selling at SFGCU PJSC, Mikhail Yatkovsky commented on the current situation on the Ukrainian wheat flour market:
"Generally, the reporting season for Ukrainian wheat flour became rather positive. Ukraine sold 1.8 mln tonnes of flour products, including State Food and Grain Corporation of Ukraine - 108 thsd tonnes on the domestic and foreign markets. First of all, the record figures of Ukrainian exports became a positive movement. Also, in the reporting season the Corporation started significantly increasing the exports. Since the beginning of the marketing season, we reached the first position, and to date we keep the leadership of Ukrainian flour exports - 55 thsd tonnes.
I should note that the market of Ukrainian flour is becoming increasingly competitive - companies develop new processing capacities and new technologies. At the same time, during several recent years Ukraine reduced the consumption of flour, and the producers are looking for new sales markets. The need to realize active sales policy on both domestic and foreign markets at the same time became the key feature of 2016/17 MY.
In my opinion, the decline in flour consumption had little effect on the production of flour in Ukraine, and major producers quickly shifted to work with foreign markets, and compensated the volumes with the required export growth. Of course, we faced the same trend. There was a slight decrease in domestic market sales, but it was negligible. At the same time, the export volumes of the Corporation increased by more than 8 thsd tonnes in comparison with the previous season.
China remained our largest sales partner, which purchased more than 30 thsd tonnes of Ukrainian flour. We started working with Libya and Somalia, and shipped more than 3 thsd tonnes and 6 thsd tonnes of flour to the countries, respectively. Also, Palestine, Angola, Moldova, the United Arab Emirates, Israel and Singapore were the traditional markets in the reporting season. For the first time, we shipped flour to Lebanon. Generally, the countries of Africa and the Middle East are the most perspective ones for the exports of Ukrainian flour.
I believe that there are no global and objective limits to the further growth of exports.”
Prospects and expectations
In the new season, Ukraine will slightly reduce the production of wheat flour, while the domestic consumption will remain at the same level (2.32 mln tonnes). APK-Inform analysts estimated the export potential of Ukrainian flour at the level of 2016/17 MY, but in terms of the positive dynamics the analysts will somewhat increase the figures.
Most representatives of flour mills believe that in short term the domestic market will continue keeping all previously established trends in terms of rather low sales level of finished goods, while the exports will demonstrate high trading and purchasing rates, which would support prices. Generally, the intensive export development of Ukrainian flour will make producers to increase their production and modernize their facilities.
Anna Tanskaya, APK-Inform Agency
