Export of Black Sea grain in 2020/21 MY: clear picture or sketch?

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APK-Inform

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Traditionally, in late May, the maritime capital of Ukraine – Odessa – gathers the leaders of agricultural business and maritime industry at the international conference Grain&Maritime days in Odessa, organized by APK-Inform and Interlegal. However, the “great lockdown” abandoned the 19-years-long tradition this year...

At the same time, the global market and particularly the grain market faced so many interesting developments this year that we could not resist and offered the new type of the event to our participants – Double GMD including #GMDonline and offline #GMD Conference 2020: Summer edition to be held on August 20-21.

So, we have already held successfully the two-day conference #GMDonline and we are ready to share the most interesting features prior to the start of the new grain season.

To keep your finger on the pulse of the most recent trends on the agricultural market and the latest insights follow the updates at our web-site and join our conferences.

So, day I, part I. Let’s go!

 

The main message of the conference was the topic “Reality of the grain market and agricultural logistics in terms of the virus crisis”. The first day of the event covered Global grain perspective, and the second – Anti-crisis lessons: from pandemic to panic.

We will focus on the panel discussion where the participants shared their opinions, forecasts and factors regarding the Black Sea grains export in 2020/21 MY.

Key points included the following issues:

— Prospects of the demand for Black Sea grains in the season-2020/21 in the major consumption regions

— Changes in the trading policy of importing countries. Tariff and non-tariff barriers: matter of time, price or need?

— Impact of the currency factor and volatility of the crude oil market on the grain trade

— Expectations of exporters from beginning of the new season and the way out of the "great lockdown"

 

Production forecast for 2020-2026. Export and memorandum

Mykola Gorbachov, the President of the Ukrainian Grain Association was the moderator and opened the discussion emphasized the international grain trade in 2020/21 MY from the point of view of Ukraine.

M.Gorbachov started his presentation with the forecasts of grain production in 2020. Thus, he expected the production of wheat to reach 26.8 mln tonnes. The expert supposed that the rains had improved significantly the overall situation. The southern regions are not the main producers of grains so they will not have the notable negative influence on the general production volume. At the same time, the substantial extension of the planted area under corn could lead to the record corn output – more than 37 mln tonnes. Some decline of barley production (-1 mln tonnes) could be offset by the higher corn crop.

The UGA expected the production of sunflower and rapeseed to decline slightly in 2020 while the harvest of soybean could match the last year figure. 

M.Gorbachov estimated the total production of grain and oilseed crops at 98.3 mln tonnes in 2019 and forecasted it to decline slightly to 98 mln tonnes in 2020.

“I think the main question of the market is: what will be the export of wheat from Ukraine? How will it be regulated? 8 years ago, traders and the state signed for the first time the memorandum determining the limit volume of wheat export. It is not the most efficient way to trade, however, thus far, it is much better than the quotas that could be allocated through corrupt practices. The memorandum provides the wide range of ways to respond to any challenges. I suppose that we will exceed slightly the volume determined by the memorandum this year”. - M.Gorbachov pointed out.

He reminded that the limit volume of wheat export for 2019/20 MY specified in the memorandum totaled 20.2 mln tonnes. However, he supposed that the real exported volume would reach 20.5 mln tonnes. “Weather conditions are favorable, domestic consumption of wheat is about 8 mln tonnes, including 4 mln tonnes for food consumption. Thus, there are no problems, so the government informed that it will not implement any restrictions and the export will go on as the export of agricultural products brings about 40% of total currency returns that are so needed”. 

The expert emphasized that Ukraine produced the average 36 mln tonnes of grain and oilseed crops annually on nearly the same planted area in 2002-2006, and exported 10 mln tonnes of crops, while the consumption totaled 22.9 mln tonnes. The production volume was increased by 10 mln tonnes in 2006-2010, and then reached 58 mln tonnes in 2010-2014. The growth of corn production provided the surplus and the harvest of corn was increasing from year to year. The average output reached 77 mln tonnes in 2014-2018, while the export grew to nearly 43 mln tonnes. Many companies started to invest in port terminals and Ukraine got new technologies and possibilities. Formerly, exporters used to load 8 thsd tonnes per day and now there are terminals with daily loading capacity at 35-40 thsd tonnes.

The UGA forecasted the average annual production of grain and oilseed crops would reach 113 mln tonnes by 2022-2026. Corn will be the main driver still. The average yield of Ukrainian corn is 7 t/ha, while this figure reaches 12 t/ha in Iowa (the USA) where the climate is similar. Thus, the expert considered it to be real to raise the yield of Ukrainian corn by at least 30-40% by means of technology development. The main corn producing regions locate in the central and northern parts of the country. Moreover, the western Ukraine has rather high corn production, however, there are some logistic problems as well as the lack of elevators and storage capacities. If the climate changes continue to develop in the same direction, the agribusiness will solve these problems.

Ukraine mainly export to Europe, Asia and North Africa. M.Gorbachov supposed that Asia is the main promising destination for Ukrainian grains, as Europe would not increase the import. “There is 0.5 bln of people able to pay in Europe, and Ukraine will continue to trade with this region, however, the whole surplus of export expected by 2026 – more than 12-13 mln tonnes – will go to Asia”, - the expert summarized.

New realities and specific of trade. Non-tariff berriers and demand from China

Vladimir Osadchuk, the General Director of COFCO Agri Resources Ukraine specified the number of factors determining the trade of Ukrainian grains on the external market. Particularly, he emphasized logistic and heterogeneity of yield and production volumes of crops in Ukraine as the main challenges on the domestic market. He shared his expectation regarding the territorial distribution of crops in Ukraine as well as life hacks how to organize trade and which ports are better. Speaking about the external factors he pointed out that the traditional markets will remains the same – Europe, North Africa and Asia. However, he expect that the exporters would prefer to ship to Europe, North Africa and Middle East while the rest of the volumes would go the Asia.

He told about the fears regarding the quality of new-crop grains, mainly wheat, due to the drought observed in the southern regions as well as excessive moisture and low temperatures in northern and central regions that slowed down the development of wheat and late grains. Thus, there are doubts regarding the share of milling wheat and possibilities for grain blending, as in the recent 2-3 years, Ukraine turned to be the producer of food wheat mainly.

V.Osadchuk also mentioned the pandemic of COVID-19 as a factor affecting the external trade. Despite the overall decline of new cases in Europe, the pandemic is developing in South America and there are fears of the second wave of the disease expected by many scientists. He supposed it could cause the decline of demand for grains and food in IV quarter of 2020 and I quarter of 2021.

The expert reminded about the nontariff trade regulations in several leading importing countries, particularly in the EU and Asia. They implement or change their requirements regarding the content of chemical agents in imported goods (particularly chlorpyriphos) that could affect the demand for Ukrainian grains.

Any depressions and negative moments in the world affect trade and price of agricultural products. When the crude oil collapsed, the global demand for Ukrainian corn could decline by 6 mln tonnes according to calculations of COFCO Agri Resources Ukraine. The oversupply of corn in the USA and South America put the pressure on the Ukrainian market. Thus, US and South American corn competed with Ukrainian on the European and North African markets despite the logistical advantages for Ukraine.

Talking about the Chinese demand for Black Sea grains, the expert told that it was stable or even increased somehow. The future development will depend on pricing. The speaker reminded that the Chinese market was premium 4-5 years ago and exporters wanted to supply to China. Now, it is a regular market. Barley and corn are the key crops for export to China. Also, there are talks about the interest of China in soybean import from Ukraine, mainly GM free soybean. There are rumors about the increase of corn quotas in the new season, however, the decision is not made yet and the final volume is unknown.

Talking about export of Ukrainian barley to China, the expert pointed out the factor preventing the further growth of export. “This is the over-regulated phytosanitary protocol signed by Ukraine and China that complicates the work of our traders on formalization of areas suitable for cultivation. Now, there are negotiations between the State Service of Ukraine on Food Safety and Consumer Protection and the Chinese part on changes of these rules to standardize them as it was done in protocols for soybean and corn. However, this process will take a lot of time. The demand for Ukrainian barley from China is as high as in the last year. The pricing will be the only factor determining the embrace of trade with China”.

Prospects of trade: heavy corn S&D and prices

Timur Shyshlov, Trader Risoil Ukraine, decided to begin his speech about the prospects of demand for Black Sea corn in 2020/21 MY from so-called corn calendar. In Northern Hemisphere the planting campaign of corn has almost ended and in general it is normal in every region. There are some questions to some US states, in particular in North Dakota the corn planting was delayed, but in global perspective it did not need extra attention. In Southern Hemisphere, in particular Argentina is harvesting corn and Brazil has started to harvest but quite slowly. In Brazil there are some concerns about the quality and volumes of production connected with the hot weather conditions.

Speaking of the global S&D of corn, the expert used the USDA May Report. And the Ministry forecasts the corn global production in 2020/21 MY at 1.186 billion tonnes, which is more than 70 mln tonnes higher year-on-year. The closing stocks of corn will also reach a record high – 139.5 mln tonnes (excluding China).

It is interesting to note that despite the increase of production and record stocks, the stock/consumption ratio is at a comfortable level – 16%. This means that together with the increase of production USDA also forecasts consumption rise – to 1.155 billion tonnes, which is 35 mln tonnes higher y-o-y and in general this increase is secured by the US. Risoil Ukraine, as many other global analysts, traders and market in general, disagrees with this figure. Due to COVID-19 pandemic the world has entered a global recession, owing to which the demand for fuel and ethanol declined, and the overall purchasing power decreased – 36.5 mln people lost their jobs in April-May. So the reason for such a big increase of the forecasts is unclear and Timur Shyshlov assumed that USDA in next reports will revise the figures down. In China the consumption is forecasted to grow by 5 mln tonnes, but the question with the quotas remains unsettled. In the EU consumption may increase by 3.6 mln tones but this figure is also questionable.

Then speaker reviewed the US S&D in details. The forecast of production is based on the planned areas and yield. The areas are close to the forecast and their final size will be announced in USDA June report, but it is already clear that they will be close to the forecast. If speaking about the yield, the experts can only assume for now. Despite the expected decline of the consumption, with all the known figures the expert built a graph of the stocks to consumption ratio thus demonstrating that it will reach 26%, which is 9% higher y-o-y. And this is a great lap, to compare: until 2013 this figure ranged within 1-4%.

Moreover, the indicator of this ratio has rather good correlation with the prices. The figure 26% corresponds to the CBOT prices at the level of 330 c/bu (average annual prices for December futures). Even now these futures fluctuate around such price but being an average this means that the current price is not a bottom line. 

Ukraine’s S&D balance and key competitors were widely discussed thus the expert said little about this topic. He noted that USDA forecasts of corn production in Brazil and Ukraine at the level of 101 and 39 mln tonnes respectively are overestimated and thus he declared the market expectations at the level of 96-98 mln tonnes for Brazil and 37 mln tonnes for Ukraine.

“Why am I talking so much about the US S&D? If we look at the history for the 5 recent years we can see that our basis is in fact twice less volatile compared to Chicago. Basis – is a difference between the physical prices on the domestic market and futures prices on CBOT. This mostly means that the prices for corn in Ukraine are determined by the prices in Chicago more than by some domestic factors. I think that considering the current global S&D, if Ukraine will have not even 39 mln tonnes but 33 mln tonnes of corn production it will not make big difference. It is possible that such a decline will potentially increase our basis, but globally we will be in a state of global overproduction and we will have to reckon with it. Thus it is important to understand what happens in the US and what are the trends on the exchange” – explained T. Shishlov.

TOP-3 importers of Ukrainian corn are generally unchanged since 2014. Next seasons there will be no significant changes, if only some redistribution between the directions. If the EU continues the import duty for corn, then most likely the EU will increase the import of corn from Romania. In this case Ukrainian grain will be delivered more actively to Turkey and Egypt. The export of corn can also possibly increase to Iran, as many Ukrainian companies have adapted to work with Iran.

Looking at the combined balances of key importers – the EU, South Korea, Iran, Egypt and Israel, - the expert noted that the import can increase by 3 mln tonnes and the domestic consumption by 6 mln tonnes. But the expert believes these figures to be overestimated. Speaking of the EU, USDA forecasts the import at 23 mln tonnes, but according to the expert the market disagrees with it. Most of the European analysts forecast the import at 19 mln tonnes thus 3-4 mln tones of key buyer import difference is a significant influence factor on the Ukrainian market closer to the end of the season.

Speaking of Egypt, the speaker demonstrated a graph of a seasonal export, emphasizing 2017/18 and 2018/19 MY. If we look at October-December period of these seasons the export of Ukrainian corn to Egypt was extremely low. According to T. Shyshlov, it is connected with the record export from Brazil (nearly 40 mln tonnes) and high export from the USA (almost 62 mln tonnes). This means that when the competition increases from other producers it effects the export from Ukraine.

“But these are only forecasts, and as Adam Smith said, an “invisible hand of a market” will lead its way, and in our case the invisible hand is a competitiveness of Ukraine on the global market compared to other producers” – noted the expert.

According to T. Shyshlov, in current prices Ukrainian corn for November-December is actually the cheapest on main destinations – Spain, Korea, China and Holland. In a normal situation, this would mean that prices have potential support, but not now. An importer is not in a hurry to buy new crop, because everyone sees the S&D balance.

In conclusion the expert noted that the revision of global corn demand forecast by USDA will make the balances even heavier. This will be the reason for further declining of corn futures on Chicago exchange. At the same time our basis will be either stable or will be rising.  Most likely Ukraine will have to buy the demand, fight for the buyer on the saturated market forecasted by the USDA.

COVID-19, prices, competition and importers' demand

The speech of Christina Serebryakova, Head of Analytical Department and Broker at Atria Brokers, was kind of a sum-up of everything said before. She noted that despite rather heavy S&D balances of the future season for both wheat and barley, the prices for new crop are currently higher compared to the last year. Firstly, this is explained by the lower forecasts of wheat production, whereas barley projections are controversial. The USDA forecasts the increase of barley production, but many analysts expect lower crop than last year. Secondly, COVID-19 and anticipations of the second wave support the prices, thus many importers will increase the purchases in order to cover the stocks on the domestic market.

The expert compared the data of wheat export from Ukraine in the current and previous seasons with the USDA forecasts for 2020/21 MY. Speaking of Egypt and Turkey analyst noted that in 2019/20 MY both countries were the largest importers of Ukrainian grain which can be explained by the good crop and higher quality, in particular owing to rather high protein. However, next season can see bigger feed grains share, which is not very good for export of wheat from Ukraine. Firstly, the country will lose its share in Egypt and Turkey and, secondly, the prices for feed wheat are expected to come under pressure of lower corn prices. Moreover, Turkey according to the USDA is expected to decrease the import by 3 mln tonnes due to better wheat harvest and high opening stocks.

Also, Ch. Serebryakova focused her attention on North Africa. Apart from Egypt, in this region Tunisia, Algeria and Morocco purchase Ukrainian wheat. It is supposed that in these countries the volume of production of all grains will decline and respectively these markets will need to import. Some part of Ukrainian feed wheat perhaps can be delivered to these destinations. Moreover, during the coronavirus pandemic many countries have taken measures to provide enough food supplies. In particular, Morocco has cancelled the import duty on wheat until the end of 2020, thus the export of feed wheat can potentially increase. However, the widening of feed wheat share in Ukrainian wheat production can negatively affect the structure of the export to destinations, because Russia “will take back” the lost shares.

According to expert, Egypt will be one the of the main importers of Ukrainian corn, which as of USDA will increase the import of corn by more than 1 mln tonnes, but the competition on this destination will be quite severe from Brazilian corn. Morocco, Algeria and Tunisia also can increase the import of corn, but in this case the competition will be higher from French grain.

The import of corn to Turkey is forecasted to decline. If this season Ukraine has actively delivered corn to this destination, next season there would be no chance to demonstrate high export activity.

Then expert focused on China’s demand. For China the USDA left the corn import forecast unchanged – at 7 mln tonnes. The main question here is: how much will China be fulfilling its obligations to the USA to import the food? In the current season US and Ukrainian corn is exported to China at a ratio approximately 50/50, thus in a new season many will depend on the policy of corn import from the USA.

Speaking of the export of barley expert first of all mentioned Saudi Arabia (main market, which Ukrainian companies are gradually loosing), where the import again is forecasted to decline (by nearly 1 mln tonnes). For now, the USDA expects the barley import to China to decline and Ukraine and France are the main suppliers of barley to China. Ukraine will also have to compete with the French barley on the market of North Africa. However, in France the production of barley this year will not change significantly from last year and only some analysts talk about the possible decline of the crop. If Ukraine to harvest the record barley crop, Ukrainian exporters will be able to offer more competitive prices.

 

That’s all for now… But You’ll be able to see whether the forecasts have been met and what should be focused on in a new 2020/21 MY on the conference Grain&Maritime days in Odessa 2020.

We wish You a successful beginning of a grain season! Good luck!

 

By Alina Timofeeva and Anna Tanskaya

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