Since the beginning of the quarantine regime in Ukraine and many other countries, the food security management is one of the most acutely discussed issues both in the world and in each specific country in particular. In the tough time, the key countries-exporters were caught up in dilemma — to continue the export operations and thereby provide foreign exchange revenues to the state budget during the viral crisis period, or should the exporters keep on the safe side and temporarily lower the trade flows?!
How did the prices of wheat and flour develop in the reporting period? What measures did the authorities take to settle the situation? What should the market expect in the short and medium term? And what do market participants think about developments on the market?
The article of APK-Inform Agency focuses on the reporting issues.
Wheat production and exports
Of course, Ukraine completely covers its domestic needs in wheat consumption, and sells the surplus on foreign markets without any risks and losses, as well as annually keeps the carry-over stocks of the grain.
According to APK-Inform figures, in 2019/20 MY the planted areas under wheat increased by 3.1% — to 6.8 mln ha, due to the growth of the yield by almost 12%, which allowed to Ukrainian farmers to harvest 28.3 mln tonnes of the grain. Taking into account the beginning stocks, the total supply reached the level of 30 mln tonnes. Such situation created the conditions for increasing of the export potential of wheat to 19.5 mln tonnes. At the same time, the general lowering of wheat sales by Russian traders who wanted to receive premium for grain quality, allowed to Ukrainian traders to increase the export rates, and increase the presence on the traditional sales markets of the competitor (including Turkey, Egypt and Bangladesh).
Taking into account the quarantine measures announced in mid-March 2020 in Ukraine due to COVID-19, many experts already discussed a lot the record export rates of wheat in the current season and possible consequences, and many politicians and media started actively speculating on the issue. At the same time, the record harvest volumes of wheat in Ukraine in 2019 mainly provided the current record export rates. At the same time, in 2019/20 MY the market participants had to face many challenges (including farmers who lost large-scale revenues, due to the foreign currency fluctuations), and possible closing of the exports may become the final straw for some companies…
Indeed, from July to March of 2019/20 MY Ukraine significantly increased the export volumes of wheat — to 17.3 mln tonnes, up 31% compared with the figures for the same period last season. Only in November, January and February, Ukraine demonstrated a slight delay in the shipment rates from the last year level. For 9 months of the season, Ukraine already realized 89% of the forecasted export potential of wheat. According to APK-Inform figures, in March 2020 the exports totaled more than 1.3 mln tonnes, up 47% compared with the March level of 2018/19 MY.
Since the beginning of April 2020, the export rates of wheat from Ukraine remained relatively high, and traders realized most shipments in accordance with previously concluded agreements, because due to the restrictions approved by the Memorandum of Understanding, the activity of concluding of new contracts for the supply of Ukrainian wheat significantly decreased, and many importers already switched to forward purchases of the new crop grain.
Flour production and stocks
APK-Inform forecasted the volumes of domestic consumption of wheat for food needs in Ukraine in 2019/20 MY at the level of 3.1 mln tonnes, including nearly 1.5 mln tonnes already processed in July-February period, which provided the production of nearly 1.15 mln tonnes of flour. At the same time, the grey market also covers some share of flour production.
According to APK-Inform analysts, in July-February period Ukraine processed almost 2 mln tonnes, and in March-April the production volumes are expected to increase, due to the growing market fever.
Taking into account the specifics of wheat flour and bran storing, it is impossible to produce the large-scale volumes for sale in the long run, so the further activity of demand for the finished products will form the market situation development.
At the same time, one thing is clear: there should be no reasons for panic in Ukraine, especially since most enterprises already have their stocks of milling wheat, and in terms of any rapid burst of consumer activity, they will be able to cover the growing demand.
According to the State Statistics Service, as of April 1 the enterprises engaged in grain storage and processing stored nearly 1.2 mln tonnes of 2- and 3-grade wheat.
After the seven-week downward trend due to the strained economic situation in the world, a series of crash of stock markets and petroleum prices due COVID-19, in the third ten-day period of March the grain prices on the Ukrainian export market began growing, in terms of the global market conditions, winning back of petroleum prices, and increasing of trade activity on the stock exchanges. Wheat demonstrated rather active price growth, due to the high demand from importers, who were afraid of possible export restrictions, and some countries already imposed the export bans. So, for the first 2 weeks of the upward trend the offer prices of Ukrainian wheat on FOB basis recovered almost 84% of the previous decline, caused by the COVID-19 pandemic, and by mid-April 2020 the prices completely updated the maximum figures since the beginning of the season.
At the same time, the price growth in CPT-port terms and on the domestic market began in early March, and developed, due to the UAH/USD collapse, in terms of news about the crash of the global market and petroleum prices to the values of 1991. Also, slowing down of the large-scale sales of wheat by farmers supported the prices, in terms of the stable high demand from processing and export-oriented companies.
Since the beginning of March till early April, the prices of 2- and 3-grade milling wheat on the domestic market increased from 4`800-5`650 UAH/t and 4`750-5`550 UAH/t to 5`600-6`550 UAH/t and 5`550-6`500 UAH/t CPT, respectively. According to grain processors, it was quite difficult to form the necessary volumes of raw materials flour milling conditions, despite the price growth.
In terms of the hype provoked by the measures to struggle against COVID-19, flour prices began actively growing in retail networks in Ukraine, followed by wheat groats and other types of groats. As a result, by the beginning of April 2020 the offer prices of premium and 1-grade flour increased from to 8`100-10`100 UAH/t and 7`900-9`200 UAH/t EXW, respectively. At the same time, only few processors managed to sell flour at the maximum selling prices.
Only in early April 2020, the price situation somewhat stabilized, as the trading and purchasing activity rates decreased, as well as the consumer activity in retail networks declined. At the same time, wheat prices on the domestic market stabilized, and the downward trend started dominating in the ports of Ukraine.
Measures to stabilize the situation
On March 27, the Ministry for Development of Economy, Trade and Agriculture of Ukraine took a number of measures to ensure the food security of the country.
In order to stabilize the prices of flour, PJSC Agrarian Fund and PJSC State Food and Grain Corporation of Ukraine (SFGCU) will supply 160 thsd tonnes of milling wheat for domestic processing and selling on the domestic market of Ukraine, which will allow producing nearly 128 thsd tonnes of flour.
On the same day, the Ministry for Development of Economy proposed to sign the Memorandum of Understanding, which limited the exports of wheat in 2019/20 MY to 20.2 mln tonnes (all grades), in order to keep the balance between domestic grain consumption and export opportunities. According to various experts, in the current trading rates, companies-exporters can ship the grain volumes offered by the Ministry by the end of May 2020.
On March 30, the authorities and grain market participants signed the Memorandum of Understanding.
On March 31, SFGCU announced that if it is necessary, the Corporation is ready to simultaneously launch all its production capacities (10 flour mills in seven oblasts of Ukraine with the general capacities of 1000 tonnes/day). Taking into account the stocks of milling wheat in SFGCU elevators at the volume of over 100 thsd tonnes, it will load all mills of the Corporation for nearly 3 following months. The grain can be sent for domestic processing and the further sale on the domestic market.
On the same day, Agrarian Fund started shipping wheat volumes for domestic processing to prevent possible increasing of bread prices.
On April 2, the Ministry for Development of Economy banned the exports of buckwheat until July 1, 2020.
On April 4, the Presidential Commissioner for Land Affairs, Roman Leshchenko, said that Ukraine will have the sufficient volumes bread and bakery products even in terms of the sharp increase in demand. According to him, the recent increase of the prices of wheat and bread on the domestic market was a temporary result of panic on the global market, due to the COVID-19 pandemic, so there are no additional restrictions on grain exports from Ukraine yet. According to him, as of the end of June 2020 the ending stocks wheat will exceed the forecasted annual use of wheat on the domestic market by 21%.
On April 8, the Minister for Development of Economy, Ihor Petrashko, said that there will be no deficit of wheat and other agricultural crops in Ukraine. The Ministry for Development of Economy actively monitored the export and import operations of all Ukrainian food products, and the current dynamics of wheat exports varied within the limits set by the Memorandum.
On April 12, I.Petrashko said that the Ministry for Development of Economy was actively monitoring the level of food prices on daily basis, and also negotiated with food producers, distributors and stores. According to the Ministry estimations, the price situation was stable and controlled.
On April 14, the Head of the National Council for economic development, Oleksiy Doroshenko, said that during the emergency situation in Ukraine the authorities will start regulating the prices of socially important products (including buckwheat groats, top-grade wheat flour, domestic macaroni and rye-wheat bread).
On April 15, Agrarian Fund announced its plans to increase the volumes of public purchases of new crop grains to ensure the food security of Ukraine. Within the financial forward program, the Fund planned to purchase almost 200 thsd tonnes of grains. Also, within the spring forward program it is planned to purchase 150-200 thsd tonnes of grains.
On April 22, the Cabinet of Ministers imposed the state regulation of the prices of food and medical products for the period of emergency situation. The list of products subject to the state regulation included flour, macaroni, bread and buckwheat groats.
Industry reaction to imposition of the price regulation
In such terms, the flour industry already worked 15 years ago. Flour production is marginally profitable by nature. Therefore, it is very strange to talk about any external control in terms of such competition rates and profitability. The selling price of flour ws always formed by the cost of raw materials. In fact, the announcement about the state regulation of prices is quite vague, and it is not clear what measures and limits will take place, reported a grain processor from Dnipropetrovsk oblast.
Another grain producer from Kyiv oblast did not believe that the measures will impact the flour milling segment. The regulations should start with grain prices, which mainly form the further prices of flour. It is still difficult to say anything about the situation. He thought that the prices will be more controlled in retail stores.
At the same time, among representatives of the flour industry there were also some less optimistic speakers.
A grain processor from Kherson oblast believed that the situation is not going to end in anything good: the market will simply go underground, perhaps there even will be some deficit.
And his colleague from Lviv oblast was even more categorical: he will not work at a loss, and simply stop the production.
Suitability of the taken measures. Conclusions and forecasts
Taking all the aforesaid into consideration, I would like to say that once again the state measures taken to settle the certain issue raised even more questions than the expected effectiveness and expediency.
Taking into account the UAH devaluation rates and the sharp rise of the prices of wheat and several alternate grains, crop processors will not be able to work exclusively on the production and selling of socially important goods. The domestic market is overstocked, and the demand rates continue decreasing every year. The purchasing power of the Ukrainians continues decreasing, and the population is constantly shrinking. Such conditions make grain processors to export flour, in order to keep the marginality, but the competition rates are very high. Closing or limiting of the exports will not settle the problem, but only make it worse.
To date, some flour companies in northern, western and central oblasts started reducing their selling prices by nearly 100-200 UAH/t, hoping to stimulate grain sales. The price situation in the Ukrainian seaports remained unstable, and the bid prices of milling wheat by grain processors also started declining, in order to keep the production profitability. The high competition rates on the global market, the cheaper Russian wheat, and the active rates of the planting works in the Black Sea region, made pressure on the prices. In particular, Ukraine already planted spring wheat throughout more than half of the planned areas. However, the prospect of the reduced wheat production leveled out the situation, due to decreasing of the areas under wheat in Ukraine in 2020/21 MY, and possible decreasing of the yield figures, in terms of insufficient level of productive moisture content in the soil and difficult agro-climatic conditions in the current month. According to preliminary estimations of APK-Inform analysts, in 2020 the general harvest of wheat will total 26.73 mln tonnes, which fits within the dynamics of seasonal fluctuations. As a reminder, in 2018/19 MY Ukrainian farmers harvested 24.6 mln tonnes of the grain only.
Imposition of the state price regulation will prevent the further resumption of price growth for flour products. On the other hand, not all grain processors have the opportunity to raise grain prices, so the demand for flour will likely continue declining.
Anna Tanskaya, APK-Inform Agency