Deal or default?! How one of the largest global corn exporter faces defaults




2020 brings more and more surprises to the market. Weather anomalies followed by sharp revision of main crops production forecasts, COVID-19 pandemic and Great lockdown, political uncertainties, economic tension, high volatility of prices, currencies, quotations, stock exchanges, and everything that can volatile… Each year if unique, however, it seems that 2020 has incorporated everything and even the invasion of aliens will not be a surprise… Market participants have scarcely adjusted to the new realities when they face something unsettling…This time Ukrainian traders faced serious possibility of defaults of forward contracts for delivery of corn.

How the stable No4 corn exporter in the world has found itself in such situation and what Ukrainian traders have to do to save the reputation of the country on the global market?

What now has rocked the market?

Just another prices surge…This time for corn, one of the most price stable crop. Deliberate pace of market work, well-known buyers, reputation of GM-free corn, stable growth of demand from China and the EU, growing interest from Egypt, increasing production in Ukraine and the world and with it competition of the global market.

Corn appreciation started long before the start of 2020/21 MY and it was not surprise. There was the same development for wheat and barley and we see the same now for sunflower seed and soybean. Corn production forecasts were set at record levels. Some experts expected the crop higher than 40 mln tonnes. Weather ruined all these expectations and prices started to grow. Black Sea and global neighbor markets pushed the prices up too. The experts started do revise their corn crop forecast down and October correction of USDA rocked the market. APK-Inform was not so optimistic and set the initial forecast at 35.1-35.4 mln tonnes. Our current estimation is 34.8 mln tonnes, while some experts set their corn crop expectations as low as 26-30 mln tonnes that fuelы tensions. Such low forecasts should be revised up along with harvesting progress.

Nothing new, but…it seems that farmers are tired to count crop and financial losses.

And now we get long-expected 200 USD/t (however, no one was expecting it anymore) and low prices of forward contracts (140-150 USD/t and 160-170 USD/t while concluded in June-July and August), complying farmers and traders who do not know what to do.

This year market participants started to conclude contracts for corn delivery earlier than usually. Spread between initial forward prices of corn and current at that moment prices of current deliveries of corn doubled (due to overestimated crop prospects). Then August came and everything changed radically.

Who is in right, who is in fault?

It is likely that some farmers lost their financial resources and nerve, while others found the way to offset previous losses. Moreover, there are farmers who yielded to temptation to get the maximum profit and decided to take advantage of the situation. How to tell the first and second from the third and what traders should do?

On the one hand, actions of farmers are understandable. As the Agrarian Union of Ukraine said, the losses of farmers on drought and frosts could reach 118 bln UAH.

On the other hand, Ukrainian farmers turned to be the price makers in recent years and know how to manipulate the prices… Traders say the main problem is unreasonable speculations of some farmers. Some part (rather big part) of possible defaults will be faced by those traders who have forward contracts with farmers whose land banks are outside of areas sharply damaged by adverse weather.

Thus, the UGA took the lead and decided to make a list of “unfair farmers”. The UGA supposes it could protect contractors and “sanitize” Ukrainian grain market. However, not all market participants (including traders) support this way out as they fear of possible speculations or biased nature of the information.

Transnational companies consider contractors should execute their contracts despite the market situation and price development. They are ready to make exceptions only for those farmers who suffered large losses on drought.

There are not so many farmers who value their reputation and are ready to fulfil their contract obligations despite unattractive prices of forwards. This happened as budgets of many farmers fall apart at the seams due to many factors (unexpected appreciation of hryvnia in 2019 resulted in profit loss and even financial charges, corona-crisis, weather factor and crop losses). 

Rather blurry understanding of forward contract on Ukrainian inner market is another reason of existing situation. Many deals concluded between companies and farmers for delivery of coming crop do not have nothing in common with forward.

Is it actually so bad?

According to different experts, in total Ukraine concluded forward contracts to sell 5-7 mln tonnes of corn, 2-2.5 mln tonnes of which should be delivered to the international markets in October. However, in the current price conjuncture and harvest progress (and the restrained selling by the farmers) there is reason to believe that not all the deals will be completed. According to the current reports by APK-Inform, since the beginning of October (as of October 19) Ukraine has exported 609 thsd tonnes of corn, which is 37.2% lower year-on-year, but 26.8% higher compared to the same period in 2018/19 MY. The analysts anticipate that in October the total deliveries of corn from Ukraine will total 1.3 mln tonnes, which is comparable to the average monthly export over the previous 8 years.

What worries the market?

Of course, defaults bring certain losses (including reputation), both for the companies and for Ukraine as an international exporter in general. But let’s be objective – the losses are inevitable. Financially either one or the other side will lose. The question is on whose side is truth or law, how to act now and how to avoid a repeat of the situation in the future? What risk hedging ways can help traders and farmers, how often are they used by Ukrainian agribusiness and why? Also, it is important to understand the issue of agricultural insurance and why it did not work, or why a number of farmers continue to consider it as another way of making money on them - they say, either traders or insurers try to take advantage over them. What is the farmers’ sale strategy and how long will the corn prices be increasing and of course, how will it influence the competitiveness? How to defuse the charged atmosphere and preserve the trend? And most important – will the corn export restriction or state regulation of prices be implemented shortly?

And in general, how have we come to this point and why is it so difficult sometimes to reach a compromise? And if the analysis influences the market so much then maybe it is time to reconsider your trust to information published in Internet groups, chats and social media…

All these pressing issues and more APK-Inform Agency offers to discuss with the experienced experts during the online conference “Corn-2020: Deal or default?!”, which will be held in November 5 in ZOOM. The main purpose of the event is an objective coverage of such a hot and controversial topic, and most importantly - delivering truthful information to importers who have already started asking "uncomfortable" questions.

In a time of the information space being full of subjective opinions of different experts, who has its own truth and reasoning, you are involuntarily wondering, who is the judge? and where to look for objectivity? In a difficult situation of corn defaults it is logical to seek advice from specialists from law firms, from independent legal advisers. So, we did it.

Lawyer’s opinion