Ukraine should “buy demand” for corn to deal with competition –Risoil

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APK-Inform

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2020/21 MY was really intensive with some unexpected moments that added the uncertainties to the market of Ukrainian corn. Sharp revaluations of production and crop failure ( not only in Ukraine), an unexpected appetite of China, tough competition in the global market and a wave of defaults on forward contracts for the supply of Ukrainian corn were some of the most memorable moments. Last year's unfulfilled corn production record was successfully achieved this year. At the same time, the current market situation can hardly be characterized as natural or expected under such production volume that is based solely on technical factors (including aggravated problems with logistics, higher transportation tariffs, lagging harvesting, increased drying costs, higher freight and demurrage). In the face of growing demand, competition is becoming tougher. Moreover, the importing countries have learned not to put all eggs into one basket. What was the start of the 2021/22 season and will Ukrainian traders be able to realize their corn potential? APK-Inform talked about this and many other issues with Timur Shishlov, a trader at Risoil Ukraine.  

– Timur, first I propose to summarize the 2020/21 MY for the Ukrainian corn market. What features and key challenges of the season would you highlight?

– The main change for the export of Ukrainian corn in the 2020/21 season was a vector on China. For the first time, China has become the largest importer of Ukrainian corn. In the previous season, Ukraine exported 23.8 mln tonnes of corn, including 8.5 mln tonnes supplied to China. In general, China has become the world leading corn importer, ahead of Mexico, Japan, the EU and South Korea, and this trend is likely to continue in the current season. Today, China imports corn from two countries – Ukraine and the United States. For a long time, there have been negotiations between Brazil and China on the subject of corn trade. However, today, certain types of weeds (or other political reasons) do not allow it.

The combination of higher imports by China and the exclusivity of Ukrainian origin was one of the main reasons for the high prices for corn in Ukraine. At the same time, due to a lower harvest, Ukraine reduced its share on the world market by 3% compared to a year earlier. According to USDA, we will return our share to the level of 16% as soon as this season.

– What was the last season for your company? What are your plans for the current marketing year?

– Despite the difficulties with deliveries by forwards and the decrease of Ukraine's share in the world exports, Risoil managed to increase its share on the Ukrainian corn market from 1.74% to 2.94%. We are planning to move in the same direction. Competition is growing every year, we try to keep up.

– Last year was one of the most unpredictable and. In addition to the high prices, players of the Ukrainian market will remember the wave of defaults on forward contracts for corn of the harvest-2020. How would you summarize what happened? What are the consequences of last year's situation?

– The consequences for companies who defaulted are obvious. The absence of a premium in sales brings more losses than a one-time profit. Let me give you an example: the difference in price at the beginning of last season (in October-November) averaged about 60 USD/t compared to the price of the forward. The company, which sold 10 thsd tonnes of corn at 160 USD/t on a forward basis decided not to fulfill its obligations and sell corn at 220 UDS/t on the spot to another trader. So, due to default, this company received a benefit in the amount of 600,000 USD. A huge sum!

But, if we look at the full picture, then we see that this company needs to sell another 300 thsd tonnes of its crop. It does not receive a long-term premium as a reliable supplier at about 3 USD/t any more (and often this premium is higher). Thus, the company loses 900,000 USD per year and it loses the access to the forward market. The market will not forget this in one season. Unfortunately, not everyone understands this. There are those who believe that it is better to make money today than to have a long-term profit from reputation.

– Do you notice any positive changes in risk management after all these events? Has the Ukrainian agribusiness interest in risk hedging increased?

– Yes, there are more requests for instruments. A call option pays off, but not in one season. It takes time for the market to form.

Let me give you one more example. When selling the forward, the farmer could have bought a call option worth 10 USD/t over the previous 6 years. Let’s suppose that the company have not used this call option for five out of six years. The loss was 50 USD/t over 5 years. However, if the price increased into the sixth year by 100 USD/t, as it was last year, then the option pays for the previous five years and makes a profit. This is a clear benefit. However, it requires a change in mentality and a conscious choice to make less money today thinking about the future and risks.

Risoil company offers such tools to its clients. We are ready to tell everyone in more detail.

– Contrary to all fears about the future of such an important tool as a forward contract after last year's wave of defaults, they began to be signed even earlier and more actively. How have the lag of the harvesting, higher moisture content, significant increase in drying costs as well as aggravation of logistics problems affected the performance of contracts?

– Compared to the last year, the situation with the execution of forwards has improved significantly. A record number of forwards have been signed this season. This was demanded by the consumer market (mainly China), and none of the trading houses can afford to reduce their market share and miss out on good opportunities. According to our estimates, the market entered 2020/21MY with the concluded forwards in the amount of 6.5 mln tonnes against 9 mln tonnes in the current season. This year, traders were more careful in choosing partners.

Of course, moisture level in corn fueled the flame. Thus, forward deliveries moved in time, in some cases for nearly a month. Besides, farmers were leaving the corn to dry naturally (as long as possible), because the price of drying due to high gas cost is very high. According to our estimates, it totals around 4 USD/t including the expenditures for transportation of wet corn from field to elevator.

The next obstacle was the doubling of the cost of logistics twice and lack of free grain cars. Both abovementioned factors led to creation of inversion on the market. This means that the product with “current” delivery is more expensive than future delivery. Such a market situation is not natural for record crop and caused by technical factors only. Traders loses money on this because they are forced to sell the delivery in the next month $10 cheaper than in late October – early November to cover the lineup. As harvesting progresses and logistics stabilizes, the inversion is leaving the market. It is a question of time.

The cost of demurrage is another very important peculiarity of the current season. Due to more than doubling freight rate (and for some directions rate rose 3 times) the cost of demurrage increased respectively or more. Panamax vessel (capacity 65000 tonnes) downtime cost per day totals $65000. Back in early 2021, the cost was $15000. This is important because it was a factor, which contributed to such rapid formation of the inversion. It is more profitable for a trader to overpay $3-5 per ton rather than risk getting 5-10 days of demurrage. Thus, when trading company has 3-4 such vessels in lineup and there are a lot of such companies, it creates a strong excitement. At the same time, farmer seeing the price rise tries to restrain the sales as much as possible. So, all of this is piling up.

- From the point of view of global conjuncture (crude oil, biofuel, inflation, freight, etc.) what factors would you single out as the main ones?

- Global conjuncture stimulates corn consumption. For example, high cost of energy contributes to the prosperity of the ethanol industry. Currently high margin motivates the industry to operate at maximum capacity. This creates additional demand on the domestic markets of the USA, South Africa and the EU.

On the other hand, high energy cost in combination with the highest inflation rate in the USA since 1990 contribute to considerable rise of net cost of corn production and other crops. According to our rough estimates, taking into consideration current cost of components, corn growing costs will increase by almost 30% year-on-year – from 1300-1400 USD/ha to 1700-1800 USD/ ha. Considering the good yield (9 t/ha) the net cost of 1 tonne totals around $200 plus VAT. This is a rough estimation, since someone bought the fertilizers earlier and someone postponed the purchase until January-February. It is important that this is a factor that will hold back the farmers’ selling in a near future. Naturally, among those who can allow financially and physically to store their harvest, expecting a rise in price.

- How do you estimate the demand from China and the EU in the context of global competition and need to preserve the attractiveness of Ukrainian products? What changes should you pay special attention to?

- Recent abolition by the EU of the 25% duty on US corn was one of the interesting innovation this season. Indeed, during the absence of active export of corn from South America on the market, and this coincides with the high rate of export from Northern Hemisphere, we were practically the exclusive supplier to the EU countries. For the last 4 seasons, the share of Ukraine ranged from 45% to 68%. Now we have to compete with the USA. Of course, there are the EU countries (such as Netherlands and Belgium), which prefer non-GM Ukrainian corn. But, there are also countries (for example, Spain and Portugal) which GM corn suits and which are guided mainly by the price. The initial forecast of corn import to the EU was 15 mln tonnes, of which Ukraine was supposed to supply the lion’s share (usually around 60%), but now this situation can change downward. Let’s see where the market takes us.

Below is the CNF matrix (the figures are relevant at the time of the preparation of the article – Ed.). The table demonstrates the competitiveness of particular origin on the main sales market. Of course, each importing country has its peculiarities, such as accreditation of the country of origin for export to China or the premium for Brazilian corn versus Ukrainian corn in Egypt. And these details are very important. But, matrix shows you a real picture, showing that at the current price after New Year we have nowhere to sell the corn, we need to “buy demand”. To reach this, either our physical price should decline or global conjuncture should change upward.

Also, we can see that despite the fact that US corn price in terms of CIF China is lower than Ukraine corn price, there are still buyers in China which as Netherlands prefer Ukrainian non-GM corn, in other words ready to pay premium. For the last 3 weeks (from the date of preparation of the article), China bought around 500-700 thsd tonnes of Ukrainian corn and at that moment the matrix showed approximately the same ratio. It is difficult to estimate in numbers the amount of such demand at this stage, we will see it at the end of the season.

- Timur, thank you for such an interesting conversation, and in conclusion, what are your expectations for 2021/22MY? What local and global factors of influence would you point out as key in the near future?

- Among the main factors I would point out the next one:

1) the highest cost of logistics in a new history of strong export (around 10 years);

2) the most expensive drying;

3) the highest cost of components for corn growing for next spring planting;

4) strengthening Ukrainian hryvnya (as of the date of preparation of the article).

All the above-mentioned factors create a situation when a farmer does not sell the corn at the volume needed to market. The farmer waits for cheaper logistics in spring, lower energy prices and consequently cheaper drying and fertilizers, besides corn will be drier naturally due to frost. All these together with the lineups at the volume of 2.5-3.5 mln tonnes will continue to support the spot prices and, as a result, inversion in a near future.

Currently, second half of the season looks quite difficult for Ukraine because competition on the market will be much higher. It is known that in the FH of the season in the USA the logistics is occupied with soybeans, in other words after New Year there will be more corn. Plus, according to the preliminary estimates, in South America the corn production is expected to reach a record high (according to the USDA in Brazil production will be 118 mln tonnes and in Argentina – 54.5 mln tonnes). In order to withstand such competition, Ukraine will need to “buy demand”.

Interviewed by Anna Tanskaya

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