First half of 2017/18 grain season was optimistic for Ukraine – Atria Brokers
The first half of 2017/18 MY for the markets of wheat and barley already approached its end. In its turn, the situation in the segment of corn just begins to clear up. What victories/defeats has Ukraine got by the beginning of the second half of the season, and what are the market expectations for the remaining part of the year?
Partners of the broker company Atria Brokers Jan Kozyritsky, Artem Rozhkov and Valery Lyulchenko told us about the most topical issues and prospects of further developments in the country.
- Jan, tell us, please about Your company.
Atria Brokers is the broker company with young team of professionals founded in 2014 in Scotland. We have three operational offices: two in Ukraine (in Kyiv and Odessa) and one in Spain (on Mallorca). At the moment we generally specialize in wheat, corn, barley. However, from time to time, we try to cover the markets of feed peas, sorghum, soybeans and soybean meal, sunflower seed, sunflower meal and cake, rapeseed, flaxseed and wheat flour.
- Jan, how do You estimate the results of the first half of the Ukrainian wheat market season? Especially, it’s interesting to know Your opinion about Asian direction taking into account the forecasted growth of wheat consumption in the specified region within the following 5 years.
I won’t reinvent the wheel if say that the first half the season was rather optimistic for Ukraine. From the point of view of rival fight on the market such victims of a drought as Australia (with the worst harvest for the last 10 years), the USA (with the most poor harvest since 2002) and Canada (with initial expectations of the worst wheat crop for the last 6 years) have given us odds in sales volumes and "have warmed up" the prices in comparison with the previous two seasons. At the same time, the competition from Russia seeking to find additional demand for the record harvest by all means constantly kept our operators in a tonne. It was felt especially in the first 2 months when the rates of export begun to lag behind for 10-13% in comparison with last year. Nevertheless, yet in October we compensated the gap, having reduced it to 5%. And in December we have all the chances to export the same delivers as last year or even outstrip them having delivered more than 11 mln tonnes of wheat to the global market.
Answering Your question about Asian market, of course, it has been forced to come to the Black Sea region as an alternative direction to Australian production where prices significantly rose. Thus, in July the spread between the Black Sea wheat with 11.5% protein content and the Australian APW wheat totaled nearly 60 USD/t with delivery to Indonesia. Unfortunately, nothing is eternal, and by the beginning of November the spread has decreased that along with possible winter interruptions in transportation has induced traders to speak about the prospects of reduced wheat supply from the Black Sea to Asia. Let us remind that in the beginning of a season experts predicted the decrease of Australian harvest to 23-24 mln tonnes (-30% in a year), then in the beginning of December analytics of the Australian bureau of rural economics and natural resources (ABARES) lowered the forecast to 20.3 mln tonnes owing to storm rains during a harvesting.
As for the Indian direction, we are pleased with that fact that it has closed already practically at the end of the first half of the season when the import duty on wheat in the amount of 20% was introduced in November. Lowering of feed wheat exports to Thailand, Korea and India was compensated by raised supplies of feed wheat to Indonesia which fights against inflated prices of corn in domestic market, and Bangladesh which intends to increase the import of wheat from 5.8 mln tonnes to 6.5 mln tonnes this season in order to accumulate the inventories after the floods destroyed some part of the harvest. At the same time, difficult conditions in state procurements of Bangladesh and also slow unloading in ports restrained desire of operators to sell production in this direction. Following the results of the first half of the season Asia remains the leading direction of Ukrainian wheat sales, however in comparison with last season its share appeared less than 60% of total exports against 65% last year.
It is absolutely clear that Russia’s entry into the Asian market was not the last reason of such a tendency. In terms of the second largest buyer of the Ukrainian wheat – Africa, then Morocco and Algeria have returned to French grain "out of habit" whereas Egypt and Tunisia, on the contrary, have increased the purchases of Ukrainian milling and feed grain. The Middle East as experts of APK-Inform Agency have already noted, has practically doubled its purchases in comparison with the previous season due to the Turkish market. The Turkish direction this year "has played" for Ukraine owing to increased price of freight delivery from Russia. On average, according to estimations of our freight department, freight rates from Russia to Turkey have raised this season up to 40-43 USD/t for due to increased demand for milling / feed grains against 20-24 USD/t for wheat freight from Ukraine. As for Israel, it is still interested in the Ukrainian feed wheat, while Lebanon – both in fodder and milling grain. In terms of the EU, then the traditional leader Ukrainian grain purchases, Spain, has been forced to increase import even more owing to the drought which has damaged it’s own harvest. By the way, increased quota for duty-free import of the Ukrainian wheat to the EU since January 1, 2018, up to 1.04 mln tonnes has to promote activation of rates of shipments. It should be added that this season Mexico has increased interest in the Ukrainian wheat to diversify sources of deliveries in view of deterioration of the American-Mexican relations.
- What were the main features of the Ukrainian market of barley this season?
For the first time in last 5 years the offer price for Ukrainian barley was on the same level as milling wheat. The Middle East led by Saudi Arabia has traditionally reserved superiority in import of the Ukrainian barley, even despite statements concerning decrease in buying plans. Besides, Turkey due to freight aspect has practically doubled purchases. The second place was taken by Asia, having pressed Africa. The Asian direction "has played" at the expense of China. Whereas Libya, Algeria, Tunisia and Morocco have significantly reduced import, having switched to cheaper alternative cultures. As for the EU, than, traditionally stable demand here is observed from Spain.
By the way, the EU has increased quota for duty-free import of the Ukrainian barley to 615 thousand since January, 2018 that should promote increase in shipments in the specified direction to 2018/19 MY.
- Valery, the market of corn did not demonstrate fast start in the current season. What are the main reasons, and what should we expect in the short term prospect?
The last 3-4 years the market starts with the prices of 163-169 USD/t, further, after the harvesting the price as a rule rises. However, so far the pressure from the global market (in particular the huge offer of the Argentina and Brazilian corn) is quite strong. Thus, it is quite possible that, despite decrease in a crop harvest in Ukraine and Russia, the global market will keep the pressure and then price increase will begin only towards the end of the season. While last season Africa was the leader in purchases of the Ukrainian corn, then this season the EU are the top importers of Ukrainian production due to the growing demand from the feed industry. At the start of October the Ukrainian corn weekly conceded it’s the share in the European market for 1-3% to Brazilian one, however the return trend is observed in November due to seasonal decrease in the South American deliveries.
Among EU countries, the higher interest in purchases of Ukrainian grain is observed from the Netherlands and Italy, rather than from Spain. At the same time, the introduction of the import duty for corn in the EU of 5.16 EUR/t in August, it’s further increase since September to 10.95 EUR/t and decrease to 5.61 EUR/t in October constrained the sales in the specified direction.
We hope for jump of deliveries of corn in January in connection with distribution of the next annual quota for duty-free import in the EU, which this year will increase to 1.13 mln tonnes. Though, even this volume is a drop in the ocean in comparison with 8-9 mln tonnes of corn which Ukraine can potentially deliver to the EU. Still we will hope for the continuation of high January sales in terms of seasonal decrease in deliveries from Brazil. The second place on purchases of the Ukrainian corn is taken by the Asian countries led by China where the competition to the American grain has amplified. In it’s turn, Africa has reduced purchases of the Ukrainian corn more than twice. As experts note, Egypt, Tunisia and Libya, even despite a difference in a freight, give preference to the grain of Argentina and Brazil referring to it’s quality. As for the Middle East, there are no sales so far to Iran, which prefers to buy grain from Brazil this season whereas Israel and Turkey have increased purchases.
- What price forecasts for grains would You make for the second half of 2017/18 MY?
As for wheat and barley, there is much more unambiguously in comparison with corn. Wheat "has glutted" the world market, and the second half of the season will be hotter than the first caused by an entry of Australian and Canadian grain to the market. In particular, fight for the Asian market will become tougher. In the second half of the season the decrease in supply of the Ukrainian wheat is traditionally expected. Barley after entry of the Australian and Argentina harvest into the market has more prospects to keep the high price positions. As for corn, in the beginning of December of this year the offer prices of Ukrainian grain, perhaps, have already reached the bottom – 161-162 USD/t FOB Mykolaiv and by the end of the first quarter of 2017/18 MY can increase up to 165 USD/t FOB Mykolaiv. The corn harvesting in Ukraine has practically finished with official yield in the bunker weight of 5.37 t/hectare. Respectively, further bearish assessments of the harvest from global analysts are possible. At the moment the low prices of corn in Ukraine force farmers to constrain sales. In case of «ice situation», there can also be the factor giving support to the prices. Besides, seasonal decrease in the competition from the Brazilian corn has already an effect if we look at rates of sales in the EU. As for the global market than we may note that the upward price tendency is prevailed in view of decreased stock reserves to nearly 200 mln tonnes for the first time during last 5 years, the great demand exceeding 1 bln tonnes and also decrease of production in Brazil and China. The lack of rains in Argentina can worsen prospects of 2017/18 grain harvest. In its turn, high yield of the American corn in 2017 and also expectations concerning the expansion of the planted area in the USA in 2018, will act as the factors containing increasing of prices.
Interviewed by Anna Tanskaya, APK-Inform Agency
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