2020/21 MY became one of the most non-standard and highly volatile seasons in terms of prices for the soybean and corn markets in Ukraine. Decrease of production, high prices and reserved farmers’ selling, wave of defaults on forward contracts for the supply of Ukrainian corn and relatively slow export progress due to unattractive prices, high competition on the domestic market and another import of soybeans by Ukrainian processors...
What experience can we get from the current season from the point of view of trading and risk-hedging instrument? Can the market regulate itself? And what to expect in the second half of the season (especially for corn) in light of the coming mass export of South American soybeans and corn?
APK-Inform spoke with Ivan Cherevko, managing partner of Agromanagement about these issues and many other.
- Ivan, share your impressions of the first part of the 2020/21 MY in terms of both stock exchange trading and your experience in physical trading. What key features would you highlight on the global and Ukrainian soybean and corn markets?
- This marketing year is unique. Both stock exchange and the physical market traders have gained a lot of experience. Traders have become even stronger and more stable. The understanding of the market has expanded, and now, when making a decision, we need to go beyond the standard framework of market analysis. 2020/21 MY pointed out the weaknesses of both individual traders and the market as a whole that was very useful. This year, it was very difficult to predict the real demand for a product that greatly changed the supply/demand balance and had an impact on prices. World production was the largest in the past several seasons, but the demand was even greater resulted in the lowest carryover stocks in several years. The main demand came from China, which was very difficult to foresee. As a result, we see the highest price level since 2014.
- Speaking about the prospects for the development of the Ukrainian soybean market in the second half of 2020/21 MY we have to take into account the influence of global factors. What are the key factors?
- The situation on the domestic soybean market is influenced by global trends that are interdependent with neighbor markets of corn, energy resources, vegetable oils, etc. After a sharp stagnation caused by the pandemic, the demand rebounded in the first half of the season. It exceeded the supply volumes for these products. Chinese demand has been grossly underestimated this season. China's soybean imports hit an all-time high of 100 mln tonnes, while US carry-over stocks hit an all-time low of nearly 3 mln tonnes. Now the market is already adjusted to the current balance, and there is a certain stabilization. The crude oil market has reached the level it had before the pandemic. Probably, it will no longer grow so dynamically. Now the factor of South America remains, as there is no clear understanding of both the production and the macroeconomic situation of Argentina. Anyway, the South America’s crop is already close, that will result in the price reduction, and the devaluation of the peso will be an incentive.
- To what extent the factors that have formed on the Ukrainian soybean market by the beginning of March (including expected delivery of the first batch of imported soybean to Ukraine, reduction of the VAT rate to 14%) will contribute to the reversal of the price trend, and how long will it be?
- Of course, the reduction of the VAT rate will be proportionally reflected in the domestic prices. Regarding the imported soybeans, I do not think this will somehow affect the domestic market, since the volumes of the first batches are insignificant, and the external price is already balanced by the world conjuncture.
- The question of practicability of soybean import to Ukraine has been in the air almost from the beginning of 2020/21 MY, while the mass discussion began when some media published obvious things. Taking into account the coming stopping of most enterprises for repair and maintenance work, is the imports rational (based on balances) or irrational and emotional (based on reserved farmers’ selling and forcing the situation by the media)?
- The market determines both price and demand. I consider the import of soybeans to Ukraine to be a very important indicator of our country as a flexible and integrated player on the world market. The Ukrainian consumer quickly found out where and how to buy more profitable. I believe, in this way, the domestic market will have a more fair price. A farmer will always want a higher price, and a processor should always have a choice of where it is more profitable for him to buy.
- Taking into account the trends of the world market, which is developing under conditions of high demand, insufficient supply and high prices, will Ukrainian crushers be able to compete on the global market of oilseeds?
- Of course, Ukraine is a very small player in the world soybean trade. But the market will regulate everything. There is enough soybean for a Ukrainian processor both on the foreign and domestic markets. The price is the only question. We need to pay at least the same price as traditional importers do. Of course, it is very difficult for a Ukrainian processor to import Panamaxes from South America or Canada, and small volumes are not so profitable to buy. This is the main difficulty. But once the same was made by Russia and the Baltic countries ...
- 2020/21 MY began with a sharp growth of corn prices followed by a wave of defaults of forward contracts. In your opinion, how long will the echoes of this situation be heard and how will this affect the future of forward contracts? What is the current activity of forward trade for deliveries of new-crop grain?
- I believe the market will not be the same. It is becoming more difficult for producers to conclude forward contracts, since most trading companies either reduced the limit for forward contracts, or abandoned them at all, or significantly tightened compliance when concluding a contract. But I can also assure that the producers, who performed signed contracts, despite the difficulties and price volatility, do not have any particular problems with the conclusion of the forward contracts. For companies that do not have a history of being a first-class supplier, it is now very difficult to get forward contracts. I think this is a positive trend. Since this will push a Ukrainian producer to conclude the same forwards on the stock exchange (futures). The producer can do hedging for 4-10% of the value of the goods (the amount that must be kept in the brokerage account). The exchange mechanism is not be caught by defaults, and it works very well. Echoes in terms of the sustainability of some companies may be heard in the next season, so I do not recommend traders to sign forwards without backing them up with notarized fixed assets. Otherwise, there is the Chicago Stock Exchange. The current high price level and the high profitability of crop production are pushing the producers to conclude forward contracts. However, according to market estimates, about 3 mln tonnes of new-crop corn have already been sold.
- This season demonstrated the necessity to use risk hedging instruments. How has the interest of Ukrainian agribusiness to them increased, or market is still mainly skeptical?
- The market, especially lately, when willing to conclude forward contracts to fix the current prices, started to study deeper the possibility how to make it at the commodity exchange. But the way of working at the exchange in Ukraine is not developed and there are few Russian-speaking consultants. The process to open broker account is not quite clear for producer as well as the technology of futures or options purchase/sale itself. But in fact, it is quite simple: the producer or trade company should have basic knowledge or address consultants to understand how the mechanism works, and then go step-by-step. Basically, now my company is fulfilling this mission, consulting the producers how to do it and which trade strategy to use for one or another product for one purpose or another.
- What hedging instruments would You recommend Ukrainian agribusiness to turn attention to? How much are they effective in terms of high price volatility?
- Of course, an option is the less risky hedging instrument, but it is also the most expensive. So, you should start from the primary task. In terms of extremely high volatility of the current market year I would highly recommend to use an option, especially if the producer takes position for longer period, for example, for next MY. If we speak about the trade company and shorter period, it is possible to use futures. The risk in this case is basis - it is a difference between the price at Chicago exchange and price in Black Sea Region. Basis also has its own volatility range, it is possible to forecast, but still this range is a risk. Despite the basis risk, I would highly recommend to use hedging together with the trade strategy of the physical product.
- Forecasts are a thankless job, especially during extremely volatile 2020/21 MY, when even corn, one of the most stable crops, became turbulent. How do You manage to work in such conditions?
- As the market became more volatile and hardly forecasted, the strategy has been changed to more risky. I take significantly smaller positions at the exchange and for longer period. I pay more attention to spread between such positions as corn and wheat. The correlation of these crops moves in historical range.
- Despite the fact that S&D balance in Ukraine and in the world is quite tight, 2020/21 MY became a season of high prices. What do You think, what is the reason?
- On the global market China is a main factor, the real demand of which appeared to be considerably higher than forecasted. Besides, it is necessary to take into account not only the global balance, but also balances of the main market players. For example, in the USA the ending stocks of soybeans and corn are the lowest in 5 years. The macroeconomics and inflation are the second important factor. The market is oversaturated with money, and one of the tools to save the assets is to invest in commodities, which added liquidity to the market and importance to the first factor.
- How would you characterize the current condition of the market of Ukrainian corn in terms of competition and demand on the global market considering the realized export potential and close entering of South American corn on the market?
- Ukraine should lower the price for corn in order to be competitive on the traditional markets - the EU and Egypt. The producer does not allow it to happen, as he holds the product. But the market economy is going to regulate this process, the more so as it is not profitable for trader to buy expensive at a loss from the producer, and he will not do it. The producer, if he wants to sell the product, has to lower the price. Thus, by lowering the price Ukrainian corn will have more entry to the traditional markets. Of course, it is possible, that China will take large part.
- Despite the controversial influence of weather factor on the corn crop in South America (corn harvest / soybean planting delays in Brazil because of rains and possible decline of corn production in Argentina due to lack of moisture), the potential of corn production in this region remains quite high. What is Your vision of this situation?
- Rains in April are extremely needed. It is very difficult to forecast the weather. But I continue to look at this situation positively. We have said the same in February and March, and in fact those rains were enough to consider the potential to be high.
- In Your opinion, how long will the support of these factors continue and when should we expect the drop?
- Perhaps, we have reached some peak, but we should not expect the price collapse. Now there is no understanding of new crop and the demand of China is in place. The S&D balance has extremely low stocks. Thus I believe that only when the new crop comes we should expect the prices to go down.
- Thank You for such an interesting conversation and please share Your expectations of the SH of 2020/21 MY. What should market participants pay attention to?
- We should keep track of such factors as China’s demand, macro-situation in the world (inflation), plantings for the new season, and also weather conditions in South America.
Interviewed by Anna Tanskaya
