One thousand and one problems of the Ukrainian export market of grains in 2017/18 MY

The grain season-2017/18 continues steadily developing, and it is already possible to say that it will be also interesting as the previous one, taking into account the situation in its beginning. Weather anomalies and lagging of the harvesting campaign rates in Ukraine, pressure of the global production of grains (especially from Russia), worsening of the current problems with the logistics and VAT refunds, problems with the phytosanitary condition and quality of exported grains... Whether the presence of a number of domestic unresolved issues in terms of high competition rates on the global market results in the fact that the threat of failure of realization of the export potential in the current season becomes a reality?

Position of Ukraine on the global market

According to APK-Inform analysts, in 2017/18 MY the general harvest of grains and pulses in Ukraine will total 64.6 mln tonnes, a decrease of 2.3% compared with the last season harvest volumes (66.1 mln tonnes). In particular, wheat production is forecasted at 26.6 mln tonnes (up 2% compared with the last year indicator), corn - 26.7 mln tonnes (down 4.8%), and barley - 8.4 mln tonnes (down 11.4%). Taking into account the carry-over stocks, the export potential of the grain market of Ukraine in 2017/18 MY totals 40.5 mln tonnes, down 10% compared with the record level last season. In particular, the export potential of wheat totals 15.5 mln tonnes (down 11.6% compared with 2016/17 MY), barley - 4.7 mln tonnes (down 12.2%), corn - 19.2 mln tonnes (down 9.9%).

At the same time, despite the general decline in production volumes, as well as the forecast of Ukrainian grain exports, in terms of high global production and large-scale carry-over stocks, and many other factors which led to perturbations in the rating of global exporters, APK-Inform Agency still forecast that in 2017/18 MY Ukraine will keep its sixth position by wheat exports, 4th - corn, and 3rd - barley. But does it provide good and stable impact, as might appear at first sight?

Challenges against realization of the export potential

Since the beginning of 2017/18 MY, Ukrainian agrarians already harvested over 49 mln tonnes of grains and pulses, and traders already managed to export more than 12.5 mln tonnes of grains. At the same time, in terms of many positive headlines describing the growth of foreign exchange earnings from exports, keeping of the upward cargo turn-over indices in the ports, and the prospect of high exports of grains from Ukraine at 70 mln tonnes, there are many less optimistic factors. However, suppression of the problems can lead to far worse consequences than their early recognition and development of a strategy for further solutions.

External factors

So, despite rather active interest in purchasing of Ukrainian barley from China and the EU countries, there was observed 24% reduction in the supplies towards such key market, as Saudi Arabia, which can reduce the imports of barley to 8 mln tonnes in 2017/18 MY, against 9.1 mln tonnes last season, due to partial substitution of the domestic demand with corn and soybean supplies. Also, since the beginning of 2017/18 MY Ukraine reduced the supplies of barley to Libya by 82%, while previously the country imported nearly 1.3-1.4 mln tonnes annually.

Ukraine entered the TOP-10 of the largest suppliers of agri-food group of goods to the European Union, and became a guarantor of the EU food security. At the same time, the EU increased the import duties on corn, sorghum and rye in 2 times, and only in October 2017 granted additional trade preferences to Ukraine for three years in the form of zero tariff quotas for Ukrainian corn and corn flour - 650 thsd tonnes, barley and barley flour - 350 thsd tonnes, wheat and wheat flour - 65 thsd tonnes.

Many traders discuss the interest of India in Ukrainian wheat, and the support which it provided for the grain prices in 2016/17 MY, while nobody forecasted how long it will last. In early 2017/18 MY, traders focused their attention on the possible growth of import duties by the Government of India, which then remained unchanged at 10%. However, the issue concerning the fumigant required by India and banned in Ukraine has not been resolved yet, and to date the Ukrainian Grain Association continues actively negotiating to replace bromomethyl with phostoxin, as in the case of Canada.

Also, in the beginning of 2017/18 MY Russia demonstrated a record high harvest volumes and top quality of wheat, while the country is the main competitor of Ukraine in the market segment. However, taking into account the logistical bottleneck, it is difficult to estimate the export potential of Russian wheat at the present stage. Nevertheless, the record production and stocks of grains in Russia continue making pressure on the price situation in the wheat sector of the global market.

In fairness, active offers of Black Sea wheat in the Middle East and Asian markets is holding back the US wheat offers. In addition, wheat of Ukrainian and Russian origin pushed back Australia from Asian markets, and grew to record levels at the expense of large wheat production in the region, and higher quality figures and competitive prices. Thus, if in August 2015 and 2016 the general wheat supplies from Ukraine and Russia to Asia totaled 2.08 mln tonnes and 2.52 mln tonnes respectively, then in August 2017 the joint supplies reached 6.55 mln tonnes, or more than 40% of the general exports of the reporting countries.

As for the prospects of Black Sea wheat on the Egyptian market in 2017/18 MY, it is worth noting that the GASC increased its requirements for the protein content in imported wheat by 0.5% for all countries-exporters. As a result, the standard for wheat supplied from Ukraine and Russia raised to 12.5%. Generally, in 2017/18 MY Egypt will remain one of the main markets for Ukrainian wheat, but there is some possibility of falling supplies to the country.

In addition, there is the important issue of allowing to mix grains of various grades in linear elevators, which actually makes Ukrainian agrarian companies to receive less profits, and the state budget - less taxes. Moreover, adoption of such decision would allow hastening the process of forming of the export batches and mixing grains in more homogeneous way.

The Director at Daniel Trading SA, Olena Neroba reported about the prospects of work of Ukrainian traders towards the key market such as Bangladesh and related hidden pitfalls:

"Despite the fact that Bangladesh is one of key partners for the Ukrainian agro-industrial complex, trading operations with the country have somewhat bitter taste. The country comes to the TOP-10 of countries-importers Ukrainian wheat and other grains, and the trade turnover between both countries demonstrates an upward trend, according to the State Statistics Service. According to many traders, the level of corruption in Bangladesh sometimes surprises even well-experienced Ukrainian traders, and often gets worsened by the regional feature to seriously delay payments for delivered products. Also, the situation with establishment of letter of credit do not even save the trading operations, because it leads to growing of the costs, in terms of high competition rates. In addition, there were many incidents of unfair play with qualitative indices of the delivered products, especially vegetable oils. In the pursuit of competitive prices, such producers and suppliers not only adversely affect the reputation of Ukraine, but also create barriers for trading with the goods that meet all quality standards. Also, there are some technical troubles, including rather shallow port waters and low unloading rates, which negatively affect the freight costs. At the same time, Bangladesh prefers importing Ukrainian forage crops, and traditionally purchases high-protein grains from India, Russia, Australia and Canada, for two reasons: first of all, it is geographical proximity, and secondly, the deficit of supply of milling grains from Ukraine. Only in 2017/18 MY, the weather somewhat adjusted the traditional geography of grain purchases. However, Bangladesh still remains one of the priority countries for Ukraine. The constant population growth stimulates demand for milling and forage crops. Ukrainian producers and traders expect for stimulation of the further development of trade relations at the country level, although they make many attempts to enter new segments of the Bangladeshi market, either independently or with the support of various industrial associations".

Internal factors

The key problems of the grain industry as follows:

- absence of balance between regulation and deregulation of the industry;

- outdated and inefficient management tools for the grain market;

- absence of any stimulation of development for small- and medium-scale business;

- problems with VAT refund, and the presence of "shadow" market of grains;

- obsolete quality standards for grains;

- absence of permission to mix different grades of grains at linear grain elevators;

- problems in receiving of a phytosanitary certificate;

- tightening of the weight-size control for heavy trucks on public roads, and the related corruption risks;

- need to develop the river transportation, etc.

At the same time, the reporting problems fade in comparison with the main barrier against realization of record export volumes of grains from Ukraine in 2016/17 MY, and the most burning issue of the season-2017/18 - logistical component. According to market participants, in the beginning of the current MY the poor situation with railway transportation somewhat worsened. According to the official statistics figures, in 2017 nearly 10%, and according to unofficial figures, nearly 30% of open rail cars and hopper cars of PJSC Ukrainian Railways (Ukrzaliznytsia) are completing their life cycle in the coming year. According to market participants, due to aging rail fleet, the industry faces annual 10% reduction in the shipped volumes. To date, the figures do not exceed 2.9 mln tonnes per month, which is specifically noticeable in such peak period of the season. Thus, many traders and forwarders note that the requests for rail cars are usually secured at 20-40%, and the problems in the Lviv Railways already reached the height.

In addition, since the beginning of August 2017 there was observed a significant worsening of the situation with grain unloading by port elevators due to poor qualitative indices of the cargoes, which fail to undergo sanitary and epidemiological control. These factors cause downtime of rail cars, and their crowding at railway stations and nearby, which significantly complicates the work of grain traders and slows down further development of the port terminals, which do not allow to operate at full capacity.

Also, in 2017/18 MY the policy of sales containment of large-scale grain batches by agrarians became another significant problem, which in the beginning of the season led to development of a bullish trend in the segment of wheat and barley. Also, the rise of prices on the global market contributed to additional support for wheat and barley prices in the reporting period. It is worth noting that the corn segment did not face any seasonal decline. Despite continuation of the harvesting campaign, new crop corn rather slowly comes on the domestic market, which in terms of high competition from processing enterprises, also contributes to the further dominance of the upward price trend.

You can receive more detailed information about the key problems of Ukrainian traders, qualitative issues of grains of the harvest-2017, and requirements of the key countries-importers, as well as development prospects of the grain season-2017/18, within frames of the conference "Grain exports from Ukraine", which takes place in Kyiv (hotel Alfavito), on November 2.

Conclusions

Generally, the export potential of Ukrainian grains and pulses decreased by 10% compared with the season-2016/17. However, it can face some risks due to a number of unresolved issues. If in the nearest future there are no meaningful actions to solve them, the situation will become critical and significantly undermine the positions of Ukraine as a reliable country-exporter.

In particular, it is necessary to optimize the legislation and instruments for the grain market regulation, develop grain quality standards in accordance with the global standards, develop the legislative framework for grain storage, simplify the procedure for issuance of phytosanitary certificates, and allow to private companies to sample and examine, etc. And the most important issue - it is required to solve the logistics problems in Ukraine.

Anna Tanskaya, APK-Inform Agency