It is difficult to underestimate the importance of the MENA region for Black Sea region in general and for Ukrainian agriproducts in particular. While having the limited abilities of grain production in terms of the stable growth of the population, countries of the region are aimed at declining of the import dependency. Thus, Saudi Arabia plays a very important role on the global market of barley with the local government aiming at diversification of the feed ration and decreasing of the import dependence on barley, which become more expensive in recent years. As a result, in 2017/18 MY in terms of barley imports the country yielded the leadership to China. Despite the declined volumes of barley imports in 2018/19 MY — from 8 mln tonnes to 7.6 mln tonnes, Saudi Arabia retook the lead, and plans to import 8.5 mln tonnes of the grain in 2019/20 MY. Moreover, in 2019/20 MY Morocco is forecasted to increase the imports of barley from 300 thsd tonnes to 1.2 mln tonnes. All these trends reflect the interest of the traders to work in this market segment.
The key features of the trade with the MENA countries in 2018/19 MY and the underlying potential problems, as well as the forecasts for 2019/20 MY, were the main questions of our interview with Roman Rusakov, the trader at OLAM INTERNATIONAL.
— Roman, for many years Your company is in the TOP-10 of exporters of barley to Saudi Arabia. How would You characterize the cooperation with this country? What are the prospects?
For 8-10 recent years, the market of barley can be divided into two parts: “before” and “after” the SAGO tender. One of the most closed markets of distribution of agriproducts with several market players from the private sector created legends, purchasing many Black Sea grains and keeping an eye on all of the suppliers of the grain. And just for the last several years it has spilled the beans and purchases the grain on the open tenders in the same format as on the wheat market of Saudi Arabia via giving the requests to the only regulator Saudi Grains Organization (SAGO), which speaks on behalf of the government, providing food security of the Kingdom.
Our company is the active participant of these tenders, having sold positions of the grain from Black Sea region, Europe and South America. Of course, Saudi Arabia is the main buyer of Ukrainian barley as it actively purchases the consignments in 60 thsd tonnes lots and the volume of purchases reaches 20-35% of the total import of the grain depending on the season tendencies. For Ukraine, these cargoes comprise 50-70% of the total annual export. First of all, the reason for this is the close geographical proximity which adds competitive advantage in terms of cheaper sea shipping compared to the deliveries from Europe, Australia or Argentina.
Ukraine’s annual export potential of barley totals 4-5.5 mln tonnes which indeed places Ukraine in TOP-3 barley exporters, so it has the high market share and the possibility to create effective trade strategies. Also, another competitive advantage for Ukrainian barley trade is the absence of high premium, observed on the markets of wheat and corn. And even if the quality of grain in some point is lower, Ukrainian barley will not be discounted by buyers, compared with the more premium barley from Australia or France. This gives the trader a possibility to provide the arbitrary and forms a wide purchasing program in different countries-exporters.
I believe that Ukraine will continue to occupy one of the leading shares of this market considering the market practicability, e.g. evident geographical, seasonal and price advantages.
— What are the key features of the work in the direction? At what stage of cooperation they are the most remarkable?
The market is full of rumors about the prospects of the barley traditions formed by private importers to return to their beginning and the further purchases of the grain will be conducted not by the governmental body, but by the private sector. Nevertheless, taking into account the tenders today, we can safely assume that the key peculiarity of the work on the market is the fine understanding of the balances of the main countries — exporters and importers. This is the market where the fundamental analysis predetermines the development of the tendencies. The absence of the hedging elements, inelastic demand, specific regions purchasing the grain and also the old traditions of this market allow the trader either to love the market or to receive the negative PnL, to seek their fortune in other products, there is no third option in terms of proactive trade activity.
Today’s tender is based on the concept of the large forwarding selling in CFR terms that allows the trader to evaluate in advance the logistics and the market of offers. In my opinion, this is a game for the large traders that have significant infrastructural power and, what is more important, the global presence on the main export-oriented market of this product which allows to estimate the production potential in a short time, the farmers’ perception, quality of the products, logistical readiness, etc.
The most important is that the market of barley is very narrow and considering the inelastic demand it faces the constant price risk, due to the limited number of offers from exporters and the limited presence of buyers on the market. Also, this market cannot be called liquid, which somewhat limits the ability of entering and exiting the positions.
— How much does the difference in the mentality influence the market of distribution? How does it show?
The market of barley is a pronounced market of position trading. The mentality of the main market players comes first. Nonetheless, the large volumes of import are traded on the open tenders where the main rules are clear and the participants are known. In general, this market has the tendency to be under control of the several traders which predetermine the conjuncture and the price formation tendencies in most cases thus having the ability to form higher volatile compared to other markets. This market is more “sensitive” and limited which makes the traders to face higher risks that give the opportunity to both — make a tremendous amount of money and finish the season without even crossing the quarterly report.
— Considering Your observations, how did the geography, volumes and list of the purchased products change among the key importers from the MENA region in 2018/19 MY? What would You mark as the main reasons for the changes?
Looking at the passing season-2018/19, we can conclude that the high prices first of all for barley with the record premium over corn changed the balance of the consumption and purchasing of the several leading participants of the import market. Herewith, the consumers in North Africa (Egypt in the first place) demonstrate enough active dynamics of the domestic demand since March in the poultry industry, and also mass consumption of corn by aquafarms. This allows keeping the upward price dynamics of import from year to year. With the necessity to increase the closing stocks and also with the concerns over the political escalation and difficulties in financial transactions, the representatives of Iran have significantly increased the import of corn from Black Sea region, preferring mostly Ukrainian grain. Herewith, the increase of Ukrainian corn imports together with the active import of Brazilian corn came as a surprise. Generally, it should be noted that Ukrainian corn had strong positions on the market of North Africa this season. Thus, the competition was limited through weak export potential of Argentina taking into account the low production last year, and few offers for non-premium market from Brazilian exporters since November that provided Ukraine with stable demand and the price rise during January-February.
Amid extremely high prices of barley, caused by the bullish production balance, the import was decreased by nearly every the MENA country. Especially it is notable on turn of Saudi Arabia — the import declined from 7.7 mln tonnes in 2017/18 MY to 6.5 mln tonnes in 2018/19 MY. Also, don’t forget that awkward rainy (especially in Iran), cold and sometimes rainy and snowy (in Saudi Arabia) days in April and March decreased the domestic consumption of barley in II and III quarter which led to lower annual volumes of barley consumption in the region.
Also, Israeli, Jordan and Saudi Arabia declined wheat import by 240 thsd tonnes compared to 2017/18 MY on behalf of the feed ration diversification, replacement of more expensive barley and wheat for cheaper corn and as a consequence the import of corn increased by 1.1 mln tonnes. Some countries were also experiencing financial problems that sometimes disrupted the importers from Syria, Yemen, Libya. Following the logic of replacement, Iran increase the import of wheat. On the other hand, Turkey declines the import of barley and corn, maintaining the import of wheat on the same level. The reason for this was the absence of problems with the new crop. The same issue with the import replacement of barley for corn can be seen in Morocco, where the import of corn is to increase by 0.5 mln tonnes driven by the equivalent declined of import of barley and less wheat.
If we analyze the last season, apart from the need to import the grain, we should also note the policy of the majority of the MENA countries that consisted in the replacement of more expensive barley and the diversification of import by other products. Nevertheless, the inelastic demand for barley, due to the absence of replacement allow decreasing its demand by some countries by the largest 10-15%.
As one of the largest importers of the region, I should note that Turkey successfully declines the general imports of grains, but it still highly depends on the domestic production.
— How do You evaluate the prospects of cooperation with this region in 2019/20 MY?
In 2019/20 MY, it is expected that the import of main grain will increase to Saudi Arabia (barley +1.5 mln tonnes, wheat +420 thsd tonnes, corn +600 thsd tonnes), Morocco (wheat +1.3 mln tonnes, barley +260 thsd tonnes). Egypt is still the leading importer of grains in the region that will increase the purchases of wheat by 450 thsd tonnes, and corn — up 350 thsd tonnes.
Turkey and Oman are among the few countries that plan to decline the import of wheat (-400 thsd tonnes and 200 thsd tonnes respectively). Other countries will either slightly increase the import of wheat or leave it in the same level as in 2018/19 MY. It is all the same with corn import — most countries will either slightly increase it or will not change. Nevertheless, it should be noted that the production potential was hit hardly by the enormous floods seen in 9 provinces of Iran and 10 provinces in Iraq. As a result, it is expected that the cumulative import of wheat will increase by 1 mln tonnes.
Speaking of the price formation for barley, I’ll dare to assume that the low cost of the production will allow some importers, first of all MENA countries (Algeria, Saudi Arabia, Libya, Lebanon and others) to increase the import in order to recover the previous volumes of stocks that decreased for the last two years.
In general, our team expect the grain imports to the MENA countries to increase in 2019/20 MY.
Interviewed by Anna Tanskaya, APK-Inform Agency
