Start of grain season-2020/21, what kind are you?

Source

APK-Inform

1825

At the very beginning, the grain season-2020/21 showed it would not be easy. However, after the challenging second half of 2019/20 MY, market participants know how to adapt to tricky and quick-changing conditions.

Let’s summarize the results of 2019/20 MY and look at the prospects and key challenges of the new season. Will Ukraine maintain its positions on the global market and what will play a crucial part in this matter?

APK-Inform raised its forecast of grain crop to 71.5 mln tonnes in Ukraine in 2020/21 MY (down 4.8% compared to 2019/20 MY) on higher expectations of production of wheat – 25.3 mln tonnes (down 10.5%), barley – 7.5 mln tonnes (down 16.3%) and corn – 36.6 mln tonnes (up 2%) due to the upward revision of the areas under these crops. The export forecast was revised up to 50.6 mln tonnes (down 8.4%), including wheat export at 17.3 mln tonnes (down 16%), barley – 3.5 mln tonnes (down 29%), and corn – 29 mln tonnes.

The forecast of USDA is more optimistic. They expect the production of Ukrainian wheat to reach 26.5 mln tonnes in 2020/21 MY, barley – 9.4 mln tonnes that will let Ukraine to export 17.5 mln tonnes and 5 mln tonnes correspondingly. Thus, Ukraine will maintain the fifth place among leading exporters of wheat and second place among TOP barley exporters.

However, it should be noted that Australia is snapping at Ukrainian heels this season. Australia could produce 26 mln tonnes of wheat and export 17.5 mln tonnes. Moreover, on July 1, the Minister for Development of Economy, Trade and Agriculture, Ihor Petrashko and the leading stakeholders of Ukrainian grain market signed the Memorandum that could limit significantly the export of Ukrainian wheat (to 17.2 mln tonnes according to the insider information). Thus, the situation is not that simple and the list of leading global exporters could change.

Currently, the pace of harvesting in Ukraine is gaining momentum, however, they are slower than the year ago. In view of problems faced by farmers of southern oblasts amid adverse weather, it was difficult for traders to fulfil the forward contracts for supply of new-crop grains.

Moreover, the currency fluctuation and concerns regarding the second wave of the pandemic of COVID-19 in autumn continue to bring uncertainty and refrain traders to trade on forward, while the importers try to cover their needs as soon as possible.

The quality of new-crop grain is a burning question. The quality of grain varies significantly across one the same region amid the contrastive and heterogeneous weather conditions across Ukraine. That complicates the formation of large-scale lots of grain with export quality. There are questions regarding the ratio of milling and feed wheat in the general wheat production volume in Ukraine. It is important as Ukrainian wheat gained a good reputation on the global market over the recent years and put competitive pressure on Russian wheat on such promising markets as Egypt and Turkey. The growing share of feed wheat could negatively affect the export of Ukrainian wheat and lower the demand from Egypt and Turkey who turned to be the biggest buyers in 2019/20 MY. Moreover, according to USDA, Turkey will decrease the import of wheat to 3.7 mln tonnes in 2020/21 MY on good own production and high carry-over stocks. At the same time, part of Ukrainian feed wheat could be supplied to Tunisia, Algeria and Morocco who could decrease the production of grains. Additionally, Morocco eliminated import tariffs of wheat until the end of 2020 to grant food security during the pandemic.

As to barley, Ukraine had supplied it to Saudi Arabia only for a long time. In recent years, Ukrainian traders were losing this market that is more sad taking into account the expected decline of barley import to China, which mainly buys it from Ukraine and France. It is difficult to compete with France, but Ukraine will have to do this...as well as on the market of North Africa. Now, we need to hope for high production of Ukrainian barley and competitive prices on the external market.

Let’s study out all this issues together with the leading representatives of Ukrainian agribusiness. The key points include:

  1. What was the season 2019/20 MY for you? Key peculiarities and challenges you faced.
  2. How did the forward trade develop? What were the main factors influencing on prices and trade strategy?
  3. Start of 2020/21 MY: what did it bring to us? Trade activity, difficulties while making up the export batches. Prospects of crop quality and quantity.
  4. Key concerns and risks. What will be the main changes in importers’ demand and competition?
  5. Key achievements and events of the company in 2019/20 MY. Plans for 2020/21 MY.

Dmitriy Minov, head of trade department at RISOIL S.A.

1. The year was interesting and eventful for our company. The holding got the liquid assets. As to the trade, there was a diversification of product range and trading tolls (other procurement procedures, basis, derivatives etc). On the other hand, the market volatility due to the huge number of events happened in 2019/20 MY added the pressure especially amid many troubles in Ukraine (bankruptcies, frauds with grains at elevators, logistical problems etc). However, generally, the year was successfully for us.

2. As to the forward trade with wheat and corn, we hedged the positions with derivatives, the liquidity was ample on both physical and e- markets for the most of the year. The correlation was not good only on the market of Ukrainian corn at the end of the season, when the CPT-port and FOB prices were almost equal due to the technical factors. However, I could say, that we would have a worse situation if we did not use Black Sea futures contract/swaps as the market was disturbed by weather, balances, COVID/lockdown, political uncertainties. As to oil and meal, we managed to buy feedstock under forward contracts at the first half of the season as usually that let us fix our by-products margin for the most of the year. This season, we plan to use Black Sea futures contract for sunflower oil as the hedge instrument.

3. The main feature of the start of 2020/21 MY was the sharp delay of the harvesting campaign compared to the last year pace. There were many talks about the severe problems with grain crop, but, apparently, it was more the escalating of the situation. Yes, in Bessarabia, the situation with crop is really difficult. However, the quality of grain from other regions is rather good and the prospects are promising. In view of crops, currently, wheat is 50/50 feed/milling, there are some concerns regarding the test weight of barley (the volume of barley with the test weight lower than 600 h/l is higher than usually), the first lots of rapeseed come with oil content at 40%. There are some concerns that incessant rains in western Ukraine will cause further deterioration of grain quality and fusarium disease. However, to my mind, it is too early to say that the problem is global.

All these factors together with the delay of the harvesting campaign heated the spot market sharply. Even as we speak, vessels remain off the harbor for loading of rapeseed, barley and wheat contracted for July delivery. But the volumes supplied are not enough. It influences on the market and its participants who are trying to purchase grain at any price to fulfil super-spot contracts. The supply of peas has been lower that year ago so far. Like year ago, processors sent prices up in July and they do not correlate with export market again. In this matter it should be noted that Russia offers rather cheap peas, however, the quality is lower. Moreover, the target markets changed.

4. As to the concerns regarding the current season, the second wave of COVID-19 is on the first place. This risk is not clear and nobody could estimate it properly as it could have global influence or turn to be overestimated depending on the scale. The important fact that market operators realized after the first month of quarantine is that people and animals keep on eating so the influence of lockdown on the agricultural sector is not as significant as on many other sectors. I suppose that we will have the second wave, but the measures will be more adaptive and flexible and the market will draw maximum conclusions from the first wave to provide the functioning of the economy. At the same time, the economies of many our target markets (like Turkey, Egypt) depend on tourism and would suffer from the second wave and could reduce the import from Ukraine.

5. Our holding had much news this year:

- we were the first in Ukraine who took the port of Kherson for concession. We plan to turn it into the liquid mini-hub for grain and by-products as well as give impetus to the development of river transportation of grain. Our trading company has been working in this port for about six months and has already attracted significant volumes of grains, oilseeds and by-products that are mainly shipped by coasters on CIF basis;

- we extended the oilseed terminal in Chernomorsk when bought the asset Ex Oila and added the heated tanks;

- we bought ore terminal in Chernomorsk thereby expanded our presence at the port and diversified our activity;

- trading company sold more than 1 mln tonnes of different agricultural products and entered the list of TOP sellers of many niche grain and oilseed crops. Moreover, we added a number of tools for farmers. For example, in corn segment, we added exchange-based contracts (basic), price revision contracts (Call option at CBOT), variable price contracts (price is determined according to the market CPT-port price as supplied).

We have many plans for the coming year. We are building the special-purpose containers and launching the container train together with our partners, we are completing the construction of a berth in Chernomorsk, we are launching the project to upgrade and extend the capacities of Bioil plant in Razdelnaya town, we are starting to upgrade intensively the port of Kherson as well as we are planning to increase our trade volumes by 30% at least.

Christina Serebryakova, Head of Analytical Department and Broker at Atria Brokers

1. Season-2019/20 was rather…long. Ukraine strengthened its positions on the markets of wheat, corn and barley on high production. Thus, the grains were accumulated in both deep-sea and shallow ports for long time. The decline of wheat crop in Russia was a fortuitous combination of circumstances that let Ukrainian exporters to prove themselves on the market of Turkey. The market volatility was the main challenge that intensified amid the coronavirus. Initially, nobody expected the virus would extend out of Asia and will support the prices in producing countries. Generally, despite the large supply of wheat and barley on the global market in 2020/21 MY, the prices are more attractive than the year ago for Ukrainian farmers, the same can't be said for corn so far.

2. Many importers shifted to spot purchases or purchases for month ahead, very occasionally – on 2 months ahead due to the higher volatility. Trade war between China and the USA supported the prices in one day and then weighted on them in the other day. Additionally, COVID-19 hurt the markets and changed drastically the development of corn market. Thus, the decline of global ethanol production by 25-50% caused the oversupply of corn in the world at 30-60 mln tonnes.

3, The start of 2020/21 MY proved that the “traditional decline of prices during harvesting campaign” happens less often. Despite the expected high production in Russia and Ukraine, the delay of the start of harvesting campaign due to rainy May-June unsettles. Thus, as of July 9, Ukraine harvested 14% of winter wheat compared to 45% year ago.

The weather adds oil to the flame as to the uncertainty regarding grain crop. Nevertheless, current forecasts expect Ukraine to harvest nearly 25-26 mln tonnes compared to initially expected 27 mln tonnes. The Ukrainian Grain Association expects 25.8 mln tonnes (28.2 mln tonnes year ago), USDA – 26.8 mln tonnes.

The situation is more exiting in Russia. Initially, the experts expected the second highest crop on record, but recently SovEcon lowered their forecast of wheat crop to 79.7 that is significantly higher compared to the USDA estimation for 2019/20 MY at 76.61 mln tonnes. However, the updated figure is sharply lower than it was set initially (84.4 mln tonnes). SovEcon mentioned that the harvesting campaign of Russian wheat was 19% completed as of mid-July. At the start of the field works, the yield was 26% lower than in 2019, but now it is only 13% lower.

We see again that USDA overestimates the figures in their May forecast and then cut them. However, it is positive for farmers as the lowering of estimations during the harvesting campaign supports the prices. Millenials are dependent on catching headlines. Like it was when France confirmed the decline of wheat production and export that pushed the Black Sea prices up, despite the fact that many analysts said it as far back as winter and spring.

Such price volatility amid the catching headlines pushes farmers to keep the grain that does not let exporters to form grain lots for export. This, in its turn, leads to price growth based on the necessity to attract grain volumes for export.

Analysts of Cotecna expect higher test weight of Russian wheat and some decline of this parameter in Ukraine. The protein content is good in Ukraine. 

As to barley prices, they are stable mostly due to quality problems. Some experts point out that the specific weight of barley of the harvest-2020 is low in northern regions and the figures vary between 55 and 58.

We have not seen the problems with corn yield so far and our forecast is 39 mln tonnes. At the same time, many market participants do not exclude further upward revision.

4. The last factor that pressured the prices of wheat is the production in Australia. However, the harvesting campaign here will start no sooner than September. Some experts expect the second wave of COVID-19 in autumn. However, many people adjusted to the coronavirus and it is difficult to imagine that the situation will change to the worse. Likely, importers will try to cover their needs at most up to the winter. At the same time, high prices will prevent. Russia will regain its leadership in wheat export (export potential at 36 mln tonnes). However, possible quotas on export of Russian wheat at the second half of the season set off alarm bells. Likely that Ukraine will strengthen its position on the export market of feed wheat in 2020/21 MY. The export potential of both milling and feed wheat is 17.2 mln tonnes that is rather good compared to 20.2 mln tonnes in 2019/20 MY and 16 mln tonnes in 2018/19 MY. At the same time, both countries will meet the competition from Australia and Argentina on the market of Southeastern Asia in November-December 2020. On the market of corn, the competition will turn to war as the global supply is very high. Frequent purchases of US corn by China are negative for Ukrainian exporters.

5. Strengthening of position of Ukraine on the global market of milling wheat, Chinese and South Korean markets of corn and North Korean market of barley was the main achievement of the country in 2019/20 MY. The plan for 2020/21 MY is to compete for corn target markets. The market of the EU is a separate issue with the import tariff on corn imposed and eliminated back and forth. The Chinese market is questionable on tricky relations with the USA.

Some importers could shift to Ukrainian wheat on lowering of wheat production forecasts in Russia and Bulgaria. Romania said it would have enough wheat for Egypt, but the Egyptian market is price-sensitive and it will be hard for Romania to compete with Ukrainian and Russian wheat in the new season. For example, Romania sold 600 thsd tonnes of wheat to Egypt at June-July tenders in 2019, while it managed to sell only 60 thsd tonnes during the same period of 2020.

As to barley, Ukraine is able to strengthen its position in China due to the decline of production in France in 2020/21 MY. IGC forecasted the French barley output to decrease to 12.2 mln tonnes compared to 13.7 mln tonnes in the preceding season.

Anna Tanskaya

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