Conditions and prospects of the Russian grain market, competition with the EU and Ukraine – A.Korbut

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APK-Inform

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Within the last 6 years Russia has on a strong note replaced  the EU and the USA as a leading global exporter of wheat. In particular, if in 2014/15 and 2015/16 MY the EU was the largest exporter, and in 2016/17 MY – the USA, for the last 3 seasons this position was taken by Russia.

In particular, according to USDA, starting 2014/15 MY the share of Russian wheat in the global export increased from 14% to 19% or from 22.8 mln tonnes to 34.5 mln tonnes, which together with the upward dynamics of the global production of grain and respectively the increase of the export, demonstrate the rise of the country’s significance on the global market.

How did the market perform in terms of the strong competition in Black Sea region and on the global market? What were the features of 2018/19 MY? What were the obstacles? What are the prospective markets and export directions for Russia in terms of wheat market? And what is more important – what to expect in new season?

These and more APK-Inform Agency asked Alexander Korbut the Vice-President of the Russian Grain Union.

 

- Alexander Vadimovich, first of all, can You please characterize the results of the grain season-2018/19. What can You remember?

Your edition constantly and professionally provides information about the grain market, so I suppose, there is no need in statistics, whereas, it would be interesting to recall some moments which caused breathless expectations and misunderstandings on the market.

First of all, in September the government has taken some steps which in my opinion lacked validity and were unbalanced. I should remind, that the Ministry of Agriculture of Russia had held several meetings with the exporters.  The background was rather obvious: the crop was lower compared to the previous year, the global prices were high, the export in July hit record – so should the country be left without the grain at all. However, in public it was reported that the export was not going to be restricted and every meeting caused the news flowing from the global agencies that in turn resulted in the price spikes in Chicago. At the same time there came the problems with the ordering of the grain wagons, the release of the documents, there was additional phitosanitary control implemented, etc. Officially, all these was explained by the objective factors. But the market, remembering the previous years, took these as a preview to the export restriction. The reply was rather simple and adequate – the export was performed even faster, in other words, everything has turned out the opposite. When understanding of the consequences came, the position was “smoothed” and the situation became calm. Almost… After, there were statements by the Head of the Federal Service for Veterinary and Phytosanitary Surveillance (Rosselkhoznadzor) S. Dankvert (which is off his jurisdiction, but the Ministry of Agriculture did not react) that the pending “offers relate to the intensification of the control over the grain shipments”, that the “fact that every company can export and [because of this] the government cannot ensure full control” and he noted that “the form of the admission of the grain for export can be changed and/or the licensing can be implemented”. I must admit that despite the fact that the market participants have already got used to a lot and in general this did not cause the standstill, all these did not add to the confidence in the predictability of the future. As a result, there came the changes in the export market, the new leaders appeared and the number of the exporters declined.

There was an important event of several assets consolidation by VTB on the south, which led to the formation of the allocation unit for transshipment in deep water, and later on there was an announcement of the intentions to create the “national champion” of grain export and some steps were taken. In my opinion, it is too early to state that there is the operational and fiscal control provided over the industry through the soft “nationalization” and the repartition of the market, but the business is worried.

The 2018/19 MY was dominated by the national project “Export of agricultural products”. I should admit that the instruments and mechanisms offered did not manage to work out, as there is a natural time lag, necessary to prepare and negotiate the documents and to move towards the practical implementation. But even those declarations which had been cited, gave some particular results. For example, several projects were expressed for the development of the port infrastructure and creations of the large enterprises of deep processing, the federal and regional authorities actively negotiate with the foreign governments, which creates the favorable background for the activity.

I suppose that the last season was rather successful for the business in particular and for Russia in general.

 

- What peculiarities of the market functioning can You mention since the beginning of 2019/20 MY?

This season has started rather interesting. At first there was a rally of the analysts increasing the crop, then declining the forecasts. However, closer to the end of the harvest, the higher yield of corn, wheat and barley, comparing to the previous season, was the reason of the upward reassessment of the forecasts. Our forecast  for today states the total products of grain at 123.5 mln tonnes (121.3 mln tonnes previously), wheat – 76 mln tonnes, barley – 21 m ln tonnes and corn – 14.4 mln tonnes.

Later of the last season’s high prices gave it their best, and physiologically the farmers were not ready to the price drop which influenced the export, the volumes of which for now remain short of the last year’s.

The market had seen the considerable increase of the shipments by the company “Mirogroup resources”, which became the trader in the VTB holding establishing and for now it shares with Glencore the 3-4 position in terms of the general grain shipments. It should be noted that initially “Mirogroup resources” purchased the grain at the prices slightly higher that of market, which was the reason for the offer to several market participants to use the possibilities of the holding (in particular, the tariffs for the transportation and transshipment) for the aggressive trade policy.

In terms of the not too high crop in Kazakhstan now already there are active purchases in Siberian and Sought Ural regions, which led to the non-traditional situation – the price rise during the massive harvest.

According to our forecasts, the domestic consumption in the best-case scenario will not change, but considering the obstacles with the livestock, it can decline. The volume of the export can total nearly 47 mln tonnes as a result by the beginning of the season we will have low opening stocks. So, the season has started unconventionally and I suppose this will go on. It is not going to be boring!

 

- In the current season Russia again has harvested more than 100 mln tonnes of grains and it is one of the best crops in 5 years in terms of the quality, isn’t it? Now the question is the selling price. Please, share Your estimations and expectation.

We believe that the modern level of technologies and the structure of the sowing areas allow us to state that Russia has the prospects to receive not less than 105-110 mln tonnes of the crops, despite the weather conditions. But the quality will still depend on the weather patterns because the quality premium is not as high and stable throughout the years in order to choose this direction as an object of the target investment. Indeed, the current year provided the high quality of wheat and You state correctly that the price is a main question here. It is obvious that prices will not be as high as last year, but the export prices are increasing now, however, by the end of the season we forecast them to decline slightly. However, such forecasts are mostly relative and are based on the expectations of the global market tendencies, and there the degree of uncertainty is rather high. Thus, the farmers in Dakota harvest the crop in snow and I suppose nobody is confident in the quality. We need time.

 

- Corn is becoming one of the prospective export directions in Russia. How in Your opinion in 2019/20 MY will this market segment develop, is there a potential for the increase of the export deliveries?

This year we expect the corn crop to total 14.4 mln tonnes and I should remind that in 1990 Russia collected nearly 2 mln tonnes only. Herewith, there was not any stimulations from the government. The market decided itself – the increase of the demand from the livestock industry and from the export. Thus, the “invisible hand of the market” works for the good of Russia. This year the corn yield is much higher year-on-year (5.65 t/ha for now, compared to 4.28 t/ha in 2018). Herewith, we believe that there will be no losses because of the weather. So these allowed us to increase the forecast of the grain production to 123.5 mln tonnes. Of course there is an export potential and I would like the USDA forecast to come true for Russia to export 5.2 mln tonnes. Herewith, our forecast is lower, especially considering the last year’s export of 3 mln tonnes, however, the potential is much higher – 6 mln tonnes.

Will we be able to sell, the time will show! It is obvious that the market will be complicated, including the bright results of Ukraine in production and export of corn, but … we will compete.

 

- Last season, the Black Sea wheat set pace on the global market owing to some uncertainty in production forecasts and the obstacles with the projection of the government’s moves. In 2019/20 MY the market is functioning in terms of the overwhelming supply of wheat in the Black Sea region. What conditions in You opinion are easier to work in?

The Black Sea region was setting pace on the global market not only last season, but for 5-7 years already and this influence I believe will preserve. Thinking about the lighter conditions to work in is a thankless occupation. We need to work in those conditions that we have. And it is necessary to admit that our and your exporters have proved they can do it. Of course, it is better when the prices are high and the competition is low. But live puts the tasks before the business every day to be resolved and we’d like to wish it to work effectively, despite any external and internal factors.

 

- In Your opinion, does the infrastructure restrain the development of the agricultural complex?

In fact today the infrastructure, or its lack of development, is a key factor which definite the external price competitiveness of our countries and the range of the risks of the fulfillment of the export obligations, thus the development of the infrastructure is a key factor and it will remain such for 5-7 years more. I should admit that with some envy I observe how Ukraine dynamically develops the seaports capacity and the fixed-route transportation. Here we have much to learn from. At the same time, the scope of the projects, especially held by the private sector, on development of the export grain ports in Russia allows us to expect that soon we will be able to stabilize the situation and provide the reduction of the rates for transshipment in seaports and then the conditions of our competition will be equal.

 

- How do You evaluate the market of auto and rail transportation and river transport in Russia in general? How strong is the competitions among them?

The main type of the transport for the delivery of the grain across Russia for the domestic consumption is the auto transportation, which occupies 86% of the total shipment of grain, the railways occupy nearly 12-14% of the domestic transportation, whereas the share of the internal river transport totals nearly 1%. In terms of the export deliveries these figures differ: the share of auto transport totals 60%, railways – 36% and water transport – nearly 3%.

Herewith, the wide use of the small ports with the following roadstead transshipment predetermine the higher share of the auto transport – nearly 80% of the grain for export is delivered by the auto transport. So today there is no real competition between the railways and river transport, but I suppose that it will grow with the intensification of the requirements concerning the bulk grain lorry overload.

 

- Lately the Prime Minister of Russia announced that the country needs to create the digital database of agricultural products. What was the reaction of the market participants? How do You estimate the degree of the implementation of the digital technologies in the agricultural area in Russia?

The future is in Big Data, herewith, the information becomes more valuable than the produce and money. The digital database is great, but the question is whether it is objective, and coincides with the realias and the general availability. The Ministry of Agriculture has several informational resourcesб which although are more for the ministry than for the market use. Such a model of the digital database in my opinion is inappropriate and irrational. In other way we will have the same we have now. For many years we worked to make the operative data concerning the sowing and harvesting progress open and we succeeded. But today these data are no longer publicly available, which limits the options of the independent analysis and decision making. Perhaps, there is something to hide (and I know what).

And the digitalization is being actively implemented in the agricultural area, herewith, it does not depend on the government. Today there were several applications created – to find machines, trading platforms and programming of the transfer; the farms analyze the data about the machines, account of the production and field works, thus saving up to 20-30% of the resources and providing their competitiveness. Several platforms perform under the patronage of the Union. This includes the Russian Grain Net of the independent monitoring of the grain quality, and the marketplace GrainCYhin, and I’m sure, there will be other.

 

- Do You agree with the statement, that “the potential of the infrastructure will increase significantly if the market will transfer from the market of goods to the market of services using the long-term exchange contracts (futures), which also will allow to boost the trade volumes”?

I don’t’ know, this question should be addressed to the authors of these finewritings. Indeed, the turnover of “shadow” grain will increase, as it was on CBOT, where the volumes of the grain trade is much higher than the volume of the real production. Futures – is a mechanism of the risk mitigation due to hedging and more precise forecasts of the future market conjuncture. Herewith, it is not about the precise figures but about the trends, which allow to run business more effectively, but nothing more. Anyway, the market of goods must end with goods, and the exchange market is only a tool to create an extra means for the real business, and the stock-exchange gambler’s turn-over or profit are of secondary importance.

 

- How has the recent strengthening of the exchange rate of the ruble had influenced the competitiveness of the Russian agricultural products on the global market? What were the losses of the Russian traders/farmers? How did it influence the activity of selling of grains and oilseeds by the agrarians?

The week ruble is a dream of the exporters, but the reality is different and the volatility of the ruble of course plays its part. But in this case, it is necessary to take into account the change of the global prices. For now, the cumulative effect of these two factors allows the exporters to perform active shipments thus they are competitive in the current conditions, but the profitability is extremely low. And in a near future there is a possibility of the further strengthening of the rule exchange rate. That’s why since the beginning of the current season the export of grain totals nearly 15 mln tones, whereas last season this number totaled 17 mln tonnes. In October 20-30 the prices in seaports have exceeded the export prices. It is unknown how long will this trend last. But it is more important for an exporter to fulfill the contract, rather than to lose the partner and the confidence in the market. The business is a risk, and the one who doesn’t take it, should leave the market.

However, maybe the agreement on the payment in national currencies concluded with Turkey will allow to depreciate this dependence, but the agreement has just been signed and it is necessary to watch the real practices of such payments, and also to analyze the possibilities of the usage of these payroll scheme with other countries.

 

- How do You evaluate the prospects of the collaboration of Russia with Turkey after the sanctions had been brought against Turkey owing to the escalation of the conflict between Turkey and Syria?

The collaboration on the market of grains had never come to a halt. Today Turkey is a leading importer of Russian grain ahead of Egypt. When we hold a conference in Baku, where the Head of the TMO participated, this questions was discussed and the prospects were rather clear, including the issue of the transition to the payment in national currencies.

 

- In mid-October Vietnam has again suspended the import of Russian wheat because the importer found the quarantine object in the grain batch -             thistle seeds. How can You comment this situation? Can it be regarded as an anticrossing barrier owing to the large opining stocks?

If we recollect the situation observed last season, Vietnam had problem of the thistle seeds in grain batches with all the exporting countries. There was even the announcement made by the phytosanitary inspectors as “return all the wheat!”. However, the authorities explained to the bureaucrats that this issue was out of their jurisdictions. Today as this problem appeared the Rosselkhoznadzor visited Vietnam and the problem seems to be solved. However, the market participants are still little tense. Your assumption is entirely appropriate because usually the extra requirements are aroused as a means of the instrument in the price straggle between the sellers and the buyers, including the use of the administrative resources.

 

- In 2019/20 MY there was also a strengthening of the Ukrainian hryvnya and the decline of the euro. As a result, European wheat strongly competes with the Russian. Considering the quality parameters of the grain, how did it influence the delivery of wheat from Russia to Egypt?

Well, this is a market. The exporters know how to work and in general it is normal competition. Russia can be moved, but little, I suppose. In this case, the euro strengthening is more important, whereas there will be no significant improvement of the quality compared to the previous year, and the logistical expenses there are rather low. In general, it is not good when the Russian and Ukrainian export depends on the weakness of the national currency. It is unnatural and set disincentives to the reduction of risks, whereas they are a basis of the competitiveness.

 

- How do You estimate the competitiveness of Russia on the global market comparing with Ukraine or Europe? What changes do You expect in geography of export of Russian grain?

Today we are fully competitive and the tenders hold by GASC and Saudi Arabia demonstrate it very well. However, the latest GASC tenders are not dominated by Russia and it is a serious signal to the market. Moreover, comparing with the previous season the quality of French wheat improved thus the competition intensifies. I should mention that Ukraine has significantly improved the quality of wheat. For 5-7 years ago the participation of Ukraine in GASC tenders was out of question. Today, it is reality and the competition rises.

In my opinion, the geography of the export will not change significantly. Russia as well as Ukraine has determined the priority markets long time ago. And now the main task is to hold the market and to open new ones. For example, such markets of distribution as Saudi Arabia and Iraq. These are very interesting destinations, and in 5 years they can add 3-5 mln tonnes to the export volumes.

 

- In recent years Kazakhstan remains one of the stable markets of distribution of Russian wheat. How do You estimate the prospects of collaboration with this country? How does the competition from the Kazakh processors influence the work of the domestic millers?

I would not call Kazakhstan the stable buyer, it is rather floating: if Kazakhstan produced less wheat it would buy many from Siberian region; if there were problems with wheat in Siberia – there would be wheat coming from Kazakhstan. However, this season it is obvious that the low production in Kazakhstan will lead to the strong flow of wheat from Russia. Notionally, it can be seen in the price dynamics for wheat in Siberia. And here I would not mention the competition between the Russian and Kazakh millers. The competition is possible when there are equal conditions for business, whereas here everything is not that easy. For example, Siberia could supply wheat to the Central Asia, but the railways transit tariffs through Kazakhstan is much higher than domestic tariffs. I suppose that it is wrong. The Common Economic Space should contain the common tariffs. And this is provided in the regulatory act of Eurasian Economic Union, but, unfortunately, it does not work when applied.

 

- Recently Russia has being actively contracting the processing plants and developing the projects of deep processing of grain. What are the results? How do You estimate the prospects of the further development of the industry with regards to the domestic consumption and export demand?

The scale of the protests in this area is rather significant, moreover, there are more new projects appear. The direction was chosen correctly, because the domestic consumption is a grain market stabilizer thus declining the prices volatility. At the same time, this is an issue of the formation of the new subsection of the processing, which is rather prospective. According to the information I have, now there are more than 30 different projects announced and realized. However, as it turns out, this process has some problems due to the fact that several projects are oriented on the linear import substitution. Herewith, the strategical export of these products would be far more correct choice. Many projects are oriented on the same-type products (for example, lysin). In terms of lysin, the production capacities put into service this year or to be put next year, will provide all the domestic needs of Russia. Herewith, the more new plants are still being contracting. The absence of the long-term territorial planning is evident, which in other words, should be the task of the Ministry of Agriculture. Nevertheless, it is one of the most prospective directions which disregarding the biofuel can create the stable channel of distribution of grain totaling 5-7 mln tonnes in 5 years.

 

- In conclusion, I thank You for such substantive discussion and I’d like to ask You to say few words about the new season’ prospects. Please, share Your estimation of the winter crops condition.

The prospects - are the potential possibilities, and the main question here is wether there are condition for their realization. It is obvious, that the crop will be rather considerable and the structure of the production fits the market and export needs. We expect the export to total 47 mln tonnes considering the favorable external factors (global prices, currency exchange rate, etc.). The agreements reached with Saudi Arabia created the background for the deliveries of wheat to this country, Russia continues cooperate with Iraq and we have already delivered 30 thsd tonnes of wheat to Brazil - so there are new market creating.

The representatives of the agrarian business have high hopes that «regulatory guillotine» will decline the current administrative barriers and will not launch new one.

The waiter sowing goes on and rather successfully, and it has reached the record - more than 18 mln ha have been planted, herewith, the current estimations of the winter crops condition are rather positive, and the winter is to be warm.  Herewith, of course, the weather conditions and the crop conditions are more important than the areas.

 

Interviewed by Anna Tanskaya, APK-Inform-Agency

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