Russian market of wheat flour - new season, new challenges

Source

APK-Inform

5917

The Russian market of wheat flour started the new season. And flour millers again activated their work, facing new challenges and finding solutions. But, before concentrating on description of the market situation in the current season, it is worth remembering, how the market of flour in Russia developed last season.

Key moments of 2010/11 MY

The last 2010/11 MY was quite complex and even unpredictable for the Russian flour milling industry, one might say. The poor harvest of grains in the majority of grain producing regions of the country contributed to active growth of prices for milling wheat. Naturally, flour milling enterprises, being the main buyers of 3-grade and 4-grade wheat on the domestic market, were forced to revise own selling prices of flour in the direction of increasing. Besides, the growth of prices affected the final product - bread and pasta.

It should be noted that the situation attracted attention of the Government, and in order to stabilize the situation on the domestic market, the authorities decided to close export trading of grains and flour products. It would seem that export-oriented companies stopped own work on the market, which could have assisted to the further increase of wheat prices, taking into account the fact that the production volumes should have been enough for the domestic consumption. At the same time, the measure of market regulation did not significantly rescued the situation, and after a slight and short-term decline the prices for grains and by-products steadily began growing again. According to market participants, agrarians held back selling of wheat volumes, which became the main factor contributing to the growth of flour prices. Thus, the first half of the reporting season was characterized by stable growth in prices for both grains and flour.

The second half of the season was dramatically different from the first one. And the price situation on the market of flour started stabilizing. Many flour millers formed the necessary stocks of grains for the near future, and stopped purchasing wheat at the prices declared by agrarians. It should also be noted that announcements of the Government on the plans to realize commodity interventions became the other factor hindering the growth of prices. Besides, grain processors noted that the consumers reduced own purchases of flour, hoping for lowering of the product prices in the future.

The intervention trades were carried out in February 2011, and played the fatal role for the market. The grain prices started actively reducing, and the price of flour followed the fall of wheat price. Therefore, taking into account the continuing bearish trend of flour prices, the consumers still did not considered expedient to purchase large-scale volumes of flour. As a result, many flour millers informed about accumulation of flour volumes in storehouses, and were forced to reduce own production rates of flour. Thus, by the middle of the second half year, the market of wheat flour was significantly over-saturated with the product, the situation continued until the end of the reporting MY. We also should specially note that grain processors did not have such critical situation, because they were able to ship flour on foreign markets. The decree of the Government on opening of the exports of grain by-products in the second half of the season accessed flour millers to enlarge the geography of selling markets, and at least slightly reduce surpluses of flour volumes on the domestic market.

Summarizing the last year data, we should note that last season was rather difficult for flour millers in the Russian Federation. The rapid growth of prices in the first half of 2010/11 MY and the sharp fall in the second half forced flour millers to work under constant pressure, and in some cases - to make decisions under extreme conditions.

First fruits of 2011/12 MY

In the beginning of 2011/12 MY the market of wheat flour faced reduction of prices and lowering of consumer activity. The sufficient number of grain offers at quite acceptable prices, and the optimistic forecast for the new harvest of wheat contributed to the situation that flour prices continued declining. Besides, the continuing bearish trend in prices did not assist to active trading on the market (buyers purchased small volumes of flour on an as-needed basis).

As agrarians continued the wheat harvesting campaign, the market of wheat flour did not significantly change. In July 2011, in the terms of sufficient number of grain offers at the acceptable prices, wheat flour prices continued decreasing. Besides, rather low demand for the product became another factor that complicated work of grain processors. According to market participants, consumers purchased small volumes of flour, while insisting on provision of price discounts.

At the same time, market participants became alarmed that during the harvesting campaign almost all regions of the country faced rains and it could affect the quality of wheat. Therefore, flour millers did not exclude the possibility that difficulties may arise with purchasing of the grain with high quality indicators in the future. However, at that time the number of grain offers was quite sufficient.

In August 2011, the flour market situation began changing dramatically. Changes on the grain market became the main reason for the development. Despite the ongoing harvesting campaign and good harvest volumes, grain prices began increasing.

The trend was caused by activities of trading companies. After a year of idleness export-oriented companies intensified the work. The global market conditions and relatively high demand in Russian grains on international markets contributed to such trend. As a result, traders rose own purchasing activity on the domestic market, and in order to attract the necessary volumes of grains, began increasing the purchasing prices. The reaction of agrarians to the situation was quite predictable. Naturally, taking into account the increased demand in grains, agricultural producers could not have missed the chance to earn, and also increased the selling prices for wheat, while reducing the number of offers. In this situation, flour millers had no choice but to also increase the purchasing prices.

The increase of grain prices was reflected in the pricing policy of the flour market. Despite the fact that the activity of trade stayed at rather low level, grain processors were forced to raise selling prices of flour. However, buyers, as before, tried to buy flour at the minimum prices. Large area of the Russian Federation and non-simultaneous beginning of the harvesting campaign, and the location of export-oriented companies played the important role in the situation. Due to the fact the grain harvesting campaign just began, flour millers of the Urals and West Siberian regions continued working with grain reserves, previously purchased at lower prices, and could offer cheaper flour on the market compared to grain processors of the European part of the country, which already received the new crop grains at the moment.

In early September, the prices for flour continued increasing gradually. It should be noted that the increase was mainly subjected to the minimum selling prices. Also, it should be noted that while fearing the further rise in prices for flour, customers also intensified their activities. But by the end of the month, the price growth for flour slowed somewhat in connection with stabilization of the price situation on the grain market.

At the same time, market participants began receiving information about the quality of grains of the harvest-2011. Grain processors reported that rains during the harvesting campaign left their mark and still made their adjustments to the quality parameters of grains. Many grain processors reported that at the present stage they have difficulties with purchasing of grains with high quality indicators, as agrarians prefer holding down the grain or sell such grain in small volumes, and try to sell wheat of lower quality, first of all. As a result, in some cases, flour millers have to pay more for high quality grains. Therefore, the assumptions of flour millers that in the middle of the season it can be difficult to purchase wheat with high quality indicators, are becoming more realistic

In addition to difficulties with purchasing of grains, flour millers faced the new problem. Since August, grain processors had difficulties with transportation of flour. According to market participants, due to reorganization of the structure of Russian railways it became problematic to rent rail cars. Besides, the cost of renting cars also increased, and the cost of transportation services increased by almost 2 times. Not being able to carry shipments of flour, some flour mills were forced to stop them. As a result, grain processors used motor vehicles as the alternative transport. But the way is appropriate only for transportation of flour within the region frames, and is not the option in winter, because the weather will hinder work of vehicles. Also, taking into account the geography of deliveries, companies will simply have to lower production volumes without railway transportation, and the milling industry will face the significant blow. According to flour millers, they are left alone with the problem, since it seems that the Government is more concerned about development of the grain business, as it focuses on solving problems on the grain market only. Some market participants commented on the situation this way: "when the prices of flour grow, bread price rises, and it is the social product, the flour millers to blame, but at the same time, when the prices for grain and flour transportation services rise, no one gives attention".

Natalia Stupaeva,

expert of the Russian market of grain by-products of APK-Inform Agency

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