Summarizing the first half of 2020/21 MY we need to point out unstable price situation in Ukrainian ports amid the overall tension and uncertainties in the world, currency fluctuation, reserved farmers’ selling as well as weather and logistical factors. Moreover, food security and tariff/non-tariff obstacles added the pressure. Despite some steps took to stabilize the situation, they did not bring relief or even complicated the situation.
The market passed the first half of the season and it starts to realize that the uncertainties are growing. Volatility brings volatility. It is hard to get the expected margin when the upward trend dartingly turns into downward and back again. So, what happened and what to wait for?
It is hard to find more volatile season. This trend was observed since the very beginning of 2020/21 MY.
Abnormally warm winter, dry spring and quite mixed summer weather resulted in rather different forecasts of grain production in Ukraine and other leading exporting countries. Overall uncertainties and concerns in the world, currency fluctuation, development of crude oil market, etc. were the base for significant fluctuation of prices. Further development of the coronavirus pandemic and vaccination continues occasionally nightmarizing the market.
Progress of harvesting campaign allowed clarifying the volume of production. However, then came concerns about deterioration of wheat quality due to dry weather, delay of harvesting campaign and reserved farmers’ selling. Paradoxically, abundant rains resulted in lower quality of wheat in western Ukraine compared to the central regions for the first time in last 6-7 years. Nevertheless, wheat of the harvest-2020 has high natural weight, despite pessimistic expectations. Milling/feed wheat ratio totaled 70:30.
APK-Inform estimated wheat crop at 25.2 mln tonnes in Ukraine in 2020/21 MY, down 11% compared to the preceding season due to lower planted and harvested areas. However, the crop was 2.4% higher compared to 2018/19 MY. USDA set Ukrainian wheat crop at 25.5 mln tonnes. The share of Ukraine in the total global wheat production declined from record 3.8% in 2019/20 MY to 3.3% this season. However, the general wheat supply increased by more than 1% in 2020/21 MY. USDA and APK-Inform expect Ukraine to export 17.5 mln tonnes of wheat in 2020/21 MY mainly due to restrictive measures implemented in th country. Thus, despite unfavorable weather influence and lower crop, Ukraine still will cover about 10% of the world wheat export. In absolute amount, the share of Ukraine in global wheat export will decline to 9% from 11% the year ago. This fact together with higher global competition pushed Ukraine to the 6th place among the leading world exporters of wheat (5th place the year ago).
Despite the overall price volatility (preliminary on CPT-port basis), the upward trend prevailed in the first half of the season. The Ukrainian market was mainly developing along with the Russian one. The development of the global market supported Ukrainian prices, despite generally high supply of wheat in the world.
High demand from importers and dominating share of Black Sea wheat on Egyptian tenders pushed Ukrainian prices. However, the competition from Russia increased on GASC tenders. Moreover, importers needed some time to get used to the high prices and continue purchasing.
The upward correction of wheat crop in the key producing regions (USA, Canada, Australia and Black Sea) pressured the Ukrainian market occasionally. At the same time, significant delay of the winter planting campaign and concerns about conditions of winter crops in the main producing counties (Black Sea, EU, USA) amid dry autumn were supporting factor for Ukrainian prices. Despite all odds, the planting campaign was completed, sprouts have been got even at very late planted fields and warm December allowed to partially compensate delay of vegetation.
At the same time, the experts informed that very late planted winter crops were still in risk. The overall conditions of winter wheat were good and satisfactory in November-December. Weather was quite favorable, that eased concerns on the market.
Nevertheless, weather factor and conditions of winter crop, the second wave of COVID-19 and lockdowns, revision of wheat balances in Ukraine, Russia and the world continued to disturb the market.
At the end of 2020, wheat sector was pressured by the global market development and high competition as well as some improvement of condition of winter crops in a number of producing countries. Expected growth of export of Russian wheat prior to entry into force of the grain export quotas weighted on the market as well.
To restrict is not to stabilize
Uncertainty regarding possible restriction of volume of wheat export from Ukraine was an important factor at the start of the season. The experts and authorities agreed the appendix to the annual grain memorandum on August 17. The limit volume was set at 17.5 mln tonnes, much lower than expected. It pushed the prices up, as importers were worried.
Nevertheless, this volume correlates with the dynamics of export of Ukrainian wheat over the last 5 years. The market adjusted to this measure in the course of the season, however, Russia poured oil on flames and caused new fluctuation.
Russia implemented the quota on grain export in 2020/21 MY at 17.5 mln tonnes in autumn. At the end of 2020, Russia implemented the export duty on wheat to stabilize the prices on the domestic market. Then the duty was raised and it would not be zeroed in the coming season.
Food security and tariff/non-tariff barriers
Wheat is a core of food security under the condition of the pandemic. This factor together with tariff/non-tariff barriers it causes is one of the most important and unpredictable. Thus, the market is focus on global demand for food and prospects of local production. It is unlikely that Ukraine will increase sharply export of grain products with added value in the next 5-10 years. Moreover, it will not be that easy to develop this segment. One has to understand clearly the needs of importers to export flour or pasta successfully.
Turkey remains a promising destination for Ukrainian wheat. It depends highly on import of wheat, as it is the leading exporter of flour and the second largest supplier of pasta. About 550 Turkish mills processed 13 mln tonnes of wheat annually. However, it is less than a half of their total capacities (about 30 mln tonnes). Turkey imports high-protein wheat. Ukraine has to compete with Russia on the Turkish market. The interest of Turkish importers has extended recently, thus, Ukraine has more chances to strengthen its position of this market with its 10.5% wheat.
Besides, pandemic created new tariff and non-tariff barriers, and some countries even started to use them as elements of political leverage. Also, importing countries demonstrate more and more concern over food security.
There is a perfect example – changes in Regulation 2020/1085 on maximum level of residues of chlorpyrifos and chlorpyrifos-methyl in agricultural and food products shipped to the EU. This requirement will affect wheat market the most, because current level for this crop is 0.50 ppm. Despite quite frequent cases of detection (every fifth sample), the usual use if this pesticide as a rule did not cause its excess. However, the rise of limits by 50 times – to 001 ppm – instantly makes Ukrainian wheat “banned” for export to the EU. Based on the research of pesticide contained in Ukrainian wheat in 2019/20 MY by Cotecna Inspection company (Black Sea and Baltic Regions) 20% of samples contained chlorpyrifos. Also, experts compared in percentage correlation to total volume of the export how much wheat containing this element each of main exporting countries delivered abroad. According to the results, Ukrainian took a leading position - 18.5%.
Fortunately, the volumes of wheat delivered to the EU are not very high, and Ukraine has to compete with such countries on other target markets. According to APK-Inform the volumes of Ukrainian wheat export to the EU in 2017 and 2018 totaled respectively 1.4 and 1.5 mln tonnes, in 2019 declined to 0.6 and in 2020 totaled 0.74 mln tonnes. But, in comparison with the total volumes of wheat export from Ukraine to the EU, 8% and 9% were delivered in 2017 and 2018, in 2019 – only 3.2% and in 2020 – 4.1%. Nevertheless, the EU countries are not the only ones who wants to limit the content of this element, this Ukraine something to think about and to strive for.
Export and competition
By the end of FH of 2020/21 MY (July-December) Indonesia remains leading export destination for Ukrainian wheat – 2.2 mln tonnes. Despite the decline of crop production in Ukraine and higher competition on wheat market from Australia, Ukrainian exporters managed to keep active deliveries to this country, similar to previous year. Egypt is second largest importer despite 29% decline in imports of Ukrainian wheat – 1.5 mln tonnes. Pakistan surprisingly became the third largest importer of wheat from Ukraine – 10% of the total exports.
In December Ukraine decreased wheat export by 2.3 times – to 0.5 mln tonnes compared to 1.16 mln tonnes in November. The main volumes were shipped to Turkey (80 thsd tonnes) and to Pakistan only 54 thsd tonnes lowest since the beginning of 2020/21 MY. However, Egypt, being the second largest importer of Ukrainian wheat, in December bought 54.4 thsd tonnes and Indonesia – nothing.
We should be proud
Taking advantage of a new opportunity this season Ukraine became the main supplier of wheat to Pakistan, which needed to replenish the stocks. According to our estimates, in July-December 2020/21 MY Ukraine exported 1.24 mln tonnes of wheat, thus providing 50% of the total import demand of the country.
USDA estimated wheat production in Pakistan in 2020/21 MY at 25.7 mln tonnes, which is 6% higher year-on-year, but does not fully cover the domestic consumption, which in December Report was increased from 24.7 to 25.8 mln tonnes (+2.4% y-o-e). Besides, in 2019/20 MY the carryover stocks in Pakistan declined by 50% to 1.3 mln tonnes compared to 2.6 mln tonnes previous season.
The fact that Pakistan would need to import wheat was clear far before the start of the season-2020/21. And already in June the Committee of Economic Coordination if Pakistan in order to stabilize the domestic prices and to form stocks allow private sector to import 2.5 mln tonnes of wheat. This measure was happily met by local market operators and in August of 2020 the government issued permits to import 1.6 mln tonnes of wheat to 380 private importers. Permit validity is unlimited and the country canceled standard tax (60%), duty (11%), sales tax (17%) and income tax for import (6%).
We should note that Russia was a main competitor which in July-November of 2020/21 MY delivered 0.91 mln tonnes of wheat to Pakistan. To compare: Ukraine exported 1.19 mln tonnes during the same period. In other words, the total delivery from both countries for 5 months reached 2 mln tonnes or 80% of the forecasted import volume.
Currently the main issue is the further export deliveries. Prices for wheat in seaports of Ukraine continue to reach new records, owing to restrained selling by farmers and high competition on the domestic market between the traders and exporters. Also, the prices were supported by the USDA downward revision of global production and stocks of wheat in 2020/21 MY – to 772.6 and 312.2 mln tonnes respectively, which are still higher y-o-y), Egypt tender (which being cancelled demonstrated decline of offers and higher prices.
Also, the prices were supported by controversial prospects of wheat crop in the US and long frost in Black Sea region. But according to Ukrainian Hydrometeorological Center during the first 10 days of January winter crops were in light winter dormancy and in southern oblasts there were small growing processes. There were no dangerous conditions for wintering of crops across the country and precipitation has somewhat reduced the fears of market participants. Together with this, late and extra late sowings remained in risk. Nevertheless, currently in Black Sea region in general and in Ukraine in particular the weather conditions improve and there is expected more precipitation which would be favorable for winter crops condition, and as a result some experts has started to increase the prospects of wheat production and export of wheat-2021 (primarily in Russia).
We should note that Ukrainian wheat became more competitive on the global market due to extremely fast increase of prices for Russian wheat following the plans of Russian government in addition to quotas to rise export tax for wheat and to preserve it in a new season. However, difficulties to form necessary volumes do not allow traders to actively conclude new contracts for the delivery of large batches of wheat, especially for later delivery terms. Moreover, the spread between the bid and offer prices increase and importers often show more interest to purchase of grain in average and small batches.
If the prices will become too high and demand continue to decline the price rally will rapidly reverse to dive. We’ve seen it many times before, even in peak periods of this season. Thus, is there any reason to hold back sales so stubbornly?