In wait for miracle...




Ukrainian and global market of flour in the first half of 2020/21 MY

Quite strange heading, as it seems at first. However, it is easy to explain - the world is waiting for miraculous changes in the new year, after shocked brought by COVID-19 last year. Someone is waiting for miracle-working vaccine, someone for mirific disappearance of the virus. People always for miracle. What should the miller wait for taking into account that 2019 was bad for both Ukrainian and global markets?

World flour trade

The volume of world flour trade was the lowest over the last 4 years in 2019/20 MY. It declined to 10.8 mln tonnes (14.4 mln tonnes in wheat equivalent), while initially it was supposed to reached 11.9 mln tonnes. As practice shows, forecasts are thankless job, mainly if such factor as pandemic interferes. Analysts make more careful and realistic forecasts for 2020/21 MY.

As to the key importers of wheat flour it should be noted that quite good wheat crop in the Middle East may mean only slight growth of flour import to Iraq in 2020/21 MY (to 1.5 mln tonnes). However, Iraq imported almost 2 mln tonnes of flour 3 years ago. Supplies to Syria will remain unchanged. Afghanistan will increase flour import to 2.5 mln tonnes. Higher demand for flour is expected in Uzbekistan, Yemen and Brazil.

Turkey will remain the leading exporter of flour. It will ship abroad 3.68 mln tonnes of the product the same as the last season.

Kazakhstan plans to increase flour export amid higher demand from Afghanistan and Uzbekistan. At the same time, shipments from Argentina will decline. International experts expect Ukraine to increase flour export in 2020/21 MY. However, I as well as many Ukrainian experts consider these expectations baseless and Ukraine will ship abroad 200 thsd tonnes of flour at its best. It is quite optimistic forecast if we look at the dynamics of flour export in the first half of season over the last years.

There are reasons for current situation,and we will examine them more detailed.

Ukrainian flour market

“First shots” for sharp decline of Ukrainian flour export appeared in March-June of the last season, when export decreased by 50%. It coincided with the first wave of coronavirus combat - lockdown, closure of cafes and restaurants, collapse of tourism, etc. Since the start of the current MY the shipments have declined from 19 thsd tonnes to 8 thsd tonnes, slight growth was observed in December only.

Similar situation was observed for all global exporters, but no so catastrophic. Key exporters are close to their main buyers. And if food and drink venues have cut the consumption of flour, baking plants and households have increased it. For example, Moldova, being our traditional buyer, has not reduced the import of Ukrainian flour. More remote importers like Israel and Palestine decreased the import only slightly. Moreover, Ukraine has continuing traditional shipments to faraway Venezuela. However, these volumes could not be compared to demand from Middle East and Africa, shipments to which were nearly absent.

I should be noted that even in such difficult conditions Ukrainian millers entered new markets (Burkina-Faso) and returned to long-forgotten – Uganda, Kongo.

One of the main negative factors, leading to significant decline of Ukrainian flour export was a great price rise. Ukrainian produce has always been attractive for its low price. Rise of global prices for wheat led to similar tendency in Ukraine. As a result – price for by-products increased too. But while wheat is an exchanged-traded product and everyone is ready for price fluctuations and play by the existing rules, things are different for flour. When buyer, who waits for paid product to be delivered in a month or two, is notified that the next batch is going to be 20-30% more expensive, he is in no hurry to pay. He has stocks, several batches are underway – he can wait for price setback or look for cheaper products. And he finds other suppliers of if not a cheaper product then with other terms of payment. For example, North Korea continues to purchase flour – not from Ukraine but from Russia, which increased export considerably. UAE also turned to other suppliers, etc.

As of mid-January 2021, price rise continued due to implementation of wheat export duty in Russia from February 15 to June 30. Besides, according to Ministry of Economic Development of Russia, the duty is not planned to be zeroed. In this case Ukrainian exporters of flour won from the duration of this situation and buyers have accepted the inevitability of higher expanses, which affected the December deliveries. Prices for high-grade flour in December varied within 280-315 USD/t FCA. The deliveries growth was small, but upward trend is still observed.

It should be noted that while some Ukrainian flour exporters were disturbed by this situation, others continued to search new ways to promote their products and did not slowed export. Roma Commercial Manufacturing Company LLC, which did not decline deliveries, lately organized the export of flour mixtures in small packaging with complex mixtures. Usual mixtures can contain fats and ferments thus their expiry date is 1-3 months. Some more expensive and complex mixtures have fats and ferments in sticks and isolated from other ingredients. Thus, their expiry date is 6-12 months. “Roma” produces and exports such mixtures for many months and constantly increases the volumes. It should be mentioned that these goods are not even usually produced on the domestic market, but have interested the importer so much that the company decided to sell to neighboring countries.

List of TOP-10 exporters did not change, despite the changes in export volumes and positions. SFGCU was replaced from 1st position by Vinnytsia Bread Factory #2. Then comes Kharkiv producers: “Enlil” Ltd and “Roma”. Also, despite the problems and pandemic, “Pivdenmlyn” increases deliveries – from 300-500 thsd tonnes last year to 800-1000 thsd tonnes this year.

Drastic decline of exports affected the volumes of flour production in Ukraine. Official data shows the direct dependence – production decline rate is the same as export decline rate. There were upward trends in December. But this does not mean that “gray” market sank! It did not change and production volumes are nearly the same. Those, who pay taxes are transparent thus the export fall led to production decline. Those, who work in shadow, do not export the goods, rarely declare it and are not included to statistics.

Clearly, global upward tendency of wheat price defined the constantly rising price for four. Ukrainian consumers, as well as global market, started to look for products at previous price, but then accepted it and began to pay the market price.

Production decline had little effect on presence degree of largest producers on the Ukrainian market. The market players are the same, traditionally headed by Vinnytsia Bread Factory #2, and produce nearly half of the total official volume of Ukrainian flour.

ТО P -10 Ukrainian mills


Separately it should be noted that Agrarian Fund JSC, which does not have any mills, produced around 40 thsd tonnes of flour for 6 months. Currently the question of transferring of the management of some state grain processing plants to Agrarian Fund has been risen again. And notably, of those plants which did not interest any investor and had been put up for auction. Agrarian Fund is ready to fully modernize the transferred plants and stabilize the market by increasing the production sharply. But, for years there is no single correct solution to the painful issue – to equip a real guarantor of the country’s food security with its own production facilities.

In December flour production in Ukraine has begun to increase which brings optimism and gives a possibility to hope for milling industry to return to pre-pandemic period. And this is not about waiting for miracle but an objective view with hope for renewing market.