Preliminary results of 2022/23 MY: disrupted logistics and Russian wheat pushed Ukraine out of key markets




Due to Russian military aggression, Ukraine's export potential has suffered significantly. In the wheat segment, the markets of Pakistan and Morocco were completely lost, deliveries to Egypt, Tunisia, Libya as well as Indonesia and other Asian countries were significantly reduced. In many of these markets, the weakening of Ukraine has played into the hands of Russia. Despite the low offer prices of Ukrainian wheat, it cannot compete with the record Russian harvest, especially in conditions of extremely difficult logistics, when the operation of the deep-see ports is limited, and the Russian side is trying to sabotage the work of the “grain corridor”. And in general, the global balance of wheat does not favor Ukraine, since almost all key exporters have quite massive volumes. As a result, for the world wheat market, the war in Ukraine, which has been going on for more than a year, turned out to be not as shocking as it had seemed at the beginning of hostilities. We talked about the results of exports in the first half of 2022/23 MY and the prospects for the second half of the season with the head of the analytical department, a broker at Atria Brokers, Christina Serebryakova.

- How can you generally comment on the results of the Ukrainian wheat export market in the first half of 2022/23 MY?

- In the first half of 2022/23 MY (July-December), Ukraine was able to supply 8.4 mln tonnes of wheat to foreign markets (of which 4.6 mln tonnes through the corridor), which was 2 times lower than 15.9 mln tonnes exported for the same period a year earlier. There are many reasons for such a significant reduction.

The key reason is the impossibility of full-fledged export through the seaports. The Black Sea grain agreement was signed on July 22, 2022, but there were no shipments in July, i.e. there was no export via the “corridor” during the first month of the season. In August, while the “grain corridor” was “warming up”, the export pace was slow, and a total of 1.7 mln tonnes of agricultural products were shipped from three ports, including less than 0.3 mln tonnes of wheat. Subsequently, shipments of both agricultural products in general and wheat in particular intensified, amounting to 3.9 and 1.2 mln tonnes respectively in September and 4.1 and 1.3 mln tonnes in October. However, then the pace of exports slowed down, since, starting from October, the representatives of the Russian side in the Joint Coordination Center (JCC) began to artificially slow down the process of ships inspections, reducing the number of inspection teams and artificially increasing the time for inspections, checking indicators not regulated by the JCC documents. Often, Russians simply refuse to work for fictional reasons. As a result, the waiting time in January increased to approximately one month. For handysize ships, this causes downtime losses in the amount of 15-20 thsd USD per day. It should be noted that mainly international companies or large Ukrainian companies that can afford high risks work in the "grain corridor".

With the impossibility of normal shipping through the seeports, exporters have significantly increased trade by alternative routes, however, there are a number of difficulties here, including a shortage of grain wagons and vehicles, queues at border crossings, and high transportation tariffs. In addition, because of the shelling of the energy infrastructure, there are delays in the movement of trains and the issuance of documents.

Thus, before the start of the war, there was virtually no export of key grain crops by road, and railway deliveries amounted to only 69 thsd tonnes in the first half of 2021/22 MY and 133 thsd tonnes in July-February 2021/22 MY, and were almost completely represented by corn. In March-June 2021/22 MY, 2.5 mln tonnes of grain were exported by rail (of which 2.4 mln tonnes of corn) and 148 thsd tonnes by road (including 137 thsd tonnes of corn). In July-December 2022/23 MY, Ukraine supplied to foreign markets 4.2 mln tonnes of grain by rail (3.2 mln tonnes of corn, 944 thsd tonnes of wheat and 50 thsd tonnes of barley) and more than 1.4 mln tonnes by road (751 thsd tonnes of corn, 573 thsd tonnes of wheat and 93 thsd tonnes of barley).

Amid significant logistical problems, it is difficult for Ukrainian grain to find a buyer, although prices are lower compared to many competitors. However, Russia creates additional problems, which offers its record harvest at low prices, and the quality parameters of Russian wheat, in particular natural weight, this season are much higher than those of Ukrainian wheat. In addition, the next stage of the prolongation of the "grain deal", which expired on March 18, was approaching, and the market was again raising concerns about whether this deal would be extended, which is why the activity of importers was falling.

- A sharp drop in the supply of Ukrainian wheat is observed in the current season in almost all key markets. What can be said about the North African region, which has traditionally been one of the leading buyers, how much has Ukraine's share fallen here and which countries have benefited?

- Egypt, one of the key buyers of Ukrainian wheat, imported only 301 thsd tonnes of wheat from Ukraine in the first half of 2022/23 MY, which is 87% less than the result for the same period in a previous season. Egypt compensated for Ukrainian wheat with Russian and European origins, imports of which increased by 13% (up to 3.5 mln tonnes) and 10% (1.6 mln tonnes), respectively. As a result, the share of Ukraine in the Egyptian market in July-December 2022/23 MY was only about 5% against 33% a year earlier, while the shares of Russia and the EU reached about 63% (44%) and 29% (20%), respectively.

Ukraine's presence in other North African markets has also been hit hard. Thus, Ukraine was a key supplier of wheat to Tunisia in the first half of 2021/22 MY (approximately 66% of the total supply to the country; 488 thsd tonnes), while in July-December 2022/23 MY shipments decreased to 150 thsd tonnes (about 18%). In this market, the loss of Ukraine's position also played into the hands of the EU and Russia. Thus, the EU increased its market share from 34% to about 41%. In July-December 2022/23 MY, Tunisia imported 137 thsd tonnes of Russian wheat, while there were no purchases for the same period a year earlier, as a result of which the share of Russian wheat in the first half of the current season was about 16%.

In the current season, there are no deliveries of Ukrainian wheat to Morocco, while in the first half of 2021/22 MY shipments amounted to 532 thsd tonnes (about 31% of the total). And the potential could be significant, given that amid a decline in its own wheat production in 2022/23 MY, Morocco can increase imports from 4.1 to 7.5 mln tonnes. Now the country mainly covers its needs with European wheat, the import of which in July-December 2022/23 MY reached 2.5 mln tonnes (approximately 84% of the total), while a year earlier it amounted to only 329 thsd tonnes (29%) and in general in 2021/22 MY reached 2.1 mln tonnes.

Deliveries to Libya have been significantly reduced. In July-December 2021/22 MY, shipments to this direction amounted to 327 thsd tonnes (about 48% of all deliveries to Libya). For the same period of 2022/23 MY deliveries totaled only 38.9 thsd tonnes (5%). Unfortunately, Russia benefited from this, which during the reported period increased wheat supplies to Libya to 674 thsd tonnes (about 90% of all deliveries to the country) against 256 thsd tonnes (38%) a year earlier. Russian origin pushed the European wheat out from the Libyan market, and its share dropped from 15% in the first half of 2021/22 MY to about 1% in July-December 2022/23 MY.

In turn, there was a slight increase in shipments of Ukrainian wheat to Algeria - up to 181 (160) thsd tonnes, which allowed Ukraine to increase its market share from about 5% to 6%. At the same time, in 2022/23 MY, competition with Russia intensified in this market. After Algeria eased the requirements for imported wheat in September 2022, raising the permissible level of insect damage from 0.1% to 0.5%, Russian wheat began to enter the Algerian market very actively. Algeria has even become one of the key buyers of Russian wheat and has already imported more product than in any previous season. As a result, Russia's share in this market increased from 8% (301 thsd tonnes) in July-December 2021/22 to about 28% (1 mln tonnes) in the first half of the current season. Most significantly, this hit the EU, whose share in the Algerian market fell from 75% to 61%.

- What is the situation in the market of Pakistan? According to USDA forecasts, in 2022/23 MY, Pakistan will again import large volumes of wheat, and we remember that in previous seasons this country was actively purchasing Ukrainian wheat.

- Before the start of the war, Ukraine was a key supplier of wheat to Pakistan. Thus, in the first half of 2021/22 MY, almost 1.2 mln tonnes of wheat were shipped to Pakistan, which accounted for about 75% of country’s total imports. In the current season, there are no deliveries of Ukrainian wheat to Pakistan. This again plays into the hands of Russia and the EU. Deliveries of Russian wheat in July-December 2022/23 MY amounted to 709 thsd tonnes (approximately 57% of the total), while there were no shipments for the same period a year earlier. Imports from the EU increased by 61% to 544 thsd tonnes. As a result, the European market share increased to around 43% from 21% a year earlier.

- And how has Ukraine's presence in the Asian market changed?

- Ukraine dominated the Indonesian market before the war, but now our share here is insignificant. Formally, the country remains among the main destinations for Ukrainian wheat, but the volumes collapsed. In the first half of 2021/22 MY, Indonesia was the leading importer of Ukrainian wheat with a volume of about 2.7 mln tonnes. For the same period of the current season, supplies amounted to only 345.6 thsd tonnes (-87%). In turn, Indonesia stepped up purchases from Australia (+46% to 2.45 mln tonens), Canada (+66% to 861 thsd tonnes) and even the EU (+72% to 227 thsd tonnes) and the USA (up by about 50 times to 250 thsd tonnes). As a result, the share of Ukraine in the Indonesian market fell from 50% in the first half of 2021/22 MY to 8% in July-December 2022/23 MY, while, for example, the share of Australia increased from 32% to 57%, of Canada from 10% to 20%.

There were practically no shipments of Ukrainian wheat to other large Asian importers. Thus, the Philippines did not purchase wheat from Ukraine at all in July-December 2022/23 MY (412 thsd tonnes a year earlier). Thailand and South Korea reduced volumes to insignificant 5 (355) thsd tonnes and 64 (396) thsd tonnes. The situation is somewhat better for Bangladesh and Vietnam - 324 (632) thsd tonnes and 123 (278) thsd tonnes respectively. Asian countries mainly compensated for the lack of supplies from Ukraine with Australian, Canadian and American origins, while Bangladesh stepped up imports from the EU.

- What can you say about exports to sub-Saharan Africa?

- In this market, the position of Ukraine is also very weakened. For example, in July-December 2022/23, shipments to Nigeria were absent, while a year earlier they amounted to 259 thsd tonnes, or about 8% of the total supply to the country. This season, this market is dominated by wheat from the EU (62% versus 35% a year earlier), the presence of the USA (23%) and Canada (7%) is also strong. At the same time, it is worth noting a significant reduction in the presence of Russia in this market, whose share fell from 20% to about 1%, most likely due to fears of Nigerian banks to work with Russia due to possible sanctions.

Also, before the war, Ukraine was a key supplier of wheat to Ethiopia. Now, deliveries to the country have decreased to 120 thsd tonnes for the first half of 2022/23 MY, which is 70% less than a year earlier. The share of Ukraine in the Ethiopian market decreased from 47% to 26%. The presence of Russia also weakened from 19% to 12%. In the current season, the lion's share of Ethiopia's imports is covered by American wheat, the share of which has increased from 26% to 57%.

- Are there any positive moments, directions with a positive dynamics of deliveries?

- In the wheat segment, it seems that the only positive moment is the figures for shipments to Turkey, which increased from 1.55 mln tonnes in July-December 2021/22 MY to 1.7 mln tonnes in 2022/23 MY. At the same time, Turkey reduced imports of Russian wheat by 15% to 4.7 mln tonnes. As a result, Ukraine's share in the Turkish wheat market increased from 21% to 26%, while Russia's share decreased from 76% to 73%.

At the same time, it should be noted that in the current season, Turkey imports more feed wheat from Ukraine rather than milling wheat. Thus, in the first half of 2022/23 MY, 769 thsd tonnes of feed wheat or 45% of the total volume were delivered to Turkey against 473 thsd tonnes (31%) a year earlier.

- A distinctive feature of wartime exports is the supply of Ukrainian grain to the EU countries for further re-export. How did the situation develop here in the first half of 2022/23 MY?

- The support of the EU countries for the export of Ukrainian grain, in particular the ability to ship it through the Romanian port of Constanta, helps a lot. After the start of the war, in March-June 2021/22 MY, 85 thsd tonnes of Ukrainian wheat were delivered to Romania, and the volume reached 1.38 mln tonnes in July-December 2022/23 MY, while there were no deliveries a year earlier. The main volumes of wheat were sent to Constanta through the ports on the Danube - 969 thsd tonnes for the first half of 2022/23 MY. Another 219 thsd tonnes were delivered by road, and 190 thsd tonnes by rail.

Also, significant volumes of Ukrainian wheat are re-exported through Poland. In July-December 2022/23, 577 thsd tonnes of wheat were shipped, of which 387 thsd tonnes were transported by rail, 190 thsd tonnes by road. In the first half of 2021/22 MY, only a bit more than 1 thsd tonnes of Ukrainian wheat was delivered to Poland.

- What prospects do you see for Ukrainian exports in the second half of 2022/23 MY? How strong will be the competition in the world market?

- According to our estimates, in the second half of 2022/23 MY, a fairly large supply of wheat will be observed on the world market.

Firstly, the potential of Ukraine for this period will be higher than a year earlier. In January-June 2021/22 MY, the country supplied 2.9 mln tonnes of wheat to foreign markets. In January-July 2022/23 MY, this figure can reach 5.1 mln tonnes, based on the export forecast by USDA for the current season at 13.5 mln tonnes.

In addition, almost all of the world's largest exporters of wheat will also have significant volumes available. First of all, Russian wheat with its attractive prices will continue to compete with Ukraine. According to our estimates, in the first half of the year Russia supplied 24.9 mln tonnes of wheat to foreign markets against 21.7 mln tonnes a year earlier. In the second half of the year, it will be able to ship 18.6 mln tonnes of wheat, which is significantly higher than 11.3 mln tonnes a year earlier. It is worth noting that initially Russian wheat shipments were not active enough given such a high harvest, which raised doubts that the country would be able to fully realize its export potential. However, in recent months the rates have intensified and exceed last year's.

Such a high supply of Russian wheat with problems with the export from Ukraine will be a key challenge for Ukrainian traders, especially in those markets where competition between the two Black Sea countries is traditionally high, such as the Middle East and North Africa.

The EU countries also have significant potential. In the first half of the year, they exported 18.1 mln tonnes of wheat (16.4 mln tonnes a year earlier), and in the second half of the season they will be able to supply 19 mln tonnes (15.5 mln tonnes).

After a very unsuccessful last season, there is a strong presence of Canada in the market this year. The country has already supplied 11.9 mln tonnes of wheat to foreign markets in July-December 2022/23 MY (8.1 mln tonnes a year earlier) and can ship another 13.1 mln tonnes in January-June (7 mln tonnes a year earlier).

The export potential of Australia, which competes with Ukraine in the markets of Southeast Asia, will be lower than last year in the second half of the season at 14.7 mln tonnes against 17 mln tonnes.

As for the United States, exports here are expected to be approximately at the level of last year at 10.1 mln tonnes against 10.7 mln tonnes in January-June 2021/22 MY.

And finally, Argentina, which is a weak competitor this season, as crop and export forecasts were steadily declining amid a prolonged drought. The country will be able to supply about 4.5 mln tonnes of wheat to foreign markets in the second half of 2022/23 MY, while shipments reached 9.7 mln tonnes a year earlier.

Interviewed by Anna Tanska