Russian wheat market at the middle of 2020/21 MY: strategy or improvisation?

Source

APK-Inform

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Alina Timofeeva

APK-Inform

To interpret one of the classics, we can say that all easy seasons are alike, but every complex season is complex in its own way. Are there any easy season at the grain market? One market participant said that the easy season is one that does not have any additional unexpected problems. The current season seemed to be one of the most favorable over the last year, but it turned into one full of the unexpected problems. How? Why? What for?

 
Promising scenario

At the end of 2020, Rosstat published he preliminary data on agricultural crops production this season. Russian farmers harvested the second largest on record 133 mln tonnes of grains and pulses in net weight in 2020/21 MY, down by 2.5 mln tonnes from the record volume of 2017. Wheat crop totaled 85.9 mln tonnes, down only 130 thsd tonnes compared to record harvest of 2017. Besides, the forecasts of many agencies were not that optimistic.

At the start of the harvesting campaign, many experts cut their forecasts of wheat crop due to the low yield of wheat in the southern Russia amid dry weather. The most significant loses were observed in Stavropol and Krasnodarsk Territories, where the crop declined by 32% and 16% correspondingly compared to 2019. However, the progress of the harvesting campaign showed that the situation was not so bad and the yield was quite good in Central and Volga FDs. The experts started to raise their production forecasts. Higher yield and wider planted area in the mentioned regions allowed increasing of wheat crop by 35% and 70% correspondingly. Wheat production grew by 4% in Siberian FD, while it declined by 21.2% in Ural FD.

Federal Centre of Quality and Safety Assurance for Grain informed about the record milling wheat crop this season. However, there are two sides of the same coin. On the one hand, better quality of Russian wheat promotes the development of milling industry in the country and the export of flour as well as raises the competitiveness of Russian product. On the other hand, many producers of mixed feed informed about slowdown of production and problems with fulfilment of previously signed contracts for supply of large volumes of the product. Problems with procurement of feed wheat were observed mainly in European part, while market participants from Ural and Siberian FDs faced the deficit of 4-grade wheat.

 
Some complication

We can compare the current season with 2017/18 MY based on the production volume. However, 3 years ago, the prices of grain virtually had covered its production costs and had been even lower in some regions, while the prices reached the historic peak on the domestic market this season. At the same time, the export prices of Russian wheat reached the level of 2015 despite the record global production. Thus, the main price-determining factor - crop size - fell into the shade, while the devil was in the detail. Let us talk about them.

- Farmers’ selling strategy. They do not want to sell most of their grain at the start of the season any more to get funds for winter planting and pay for credits. Now, they sell their wheat during the course of the season waiting for better prices. This trend is not new and observed since 2018/19 MY. Appreciation of seeds, crop protection products, petroleum products makes farmers to raise the prices if grain.

- Logistics. The Memorandum on overloading while transporting grains and oilseeds entered into force on September 15. Grain terminals stopped to accept road transport for unloading, if its weight was more than 2% higher than the permissible one. It resulted in heavier load on railway, lack of rail cars and problems with delivery of grain to ports, processors and livestock enterprise. Moreover, higher wheat crop in Central and Volga FDs put extra pressure on railway. Besides, the farmers preferred to sell the grain from the field but not to trade on CPT conditions.

- High demand on the external market. Russian wheat was the most competitive on the world market during the first half of the season as the exporters were able to supply large lots of the grain. Further spread of COVID-19 provided robust demand for wheat from importers who wanted to secure their stocks. Moreover, lower export potential of Ukrainian and European wheat amid decline of production promoted export of Russian wheat. Russia shipped about 20.9 mln tonnes of wheat abroad in July-November of 2020/21 MY, up 13% compared to the preceding season. Preliminary data shows the export of wheat at nearly 25.2 mln tonnes in July-December. Russia raised the supply of wheat to Egypt by 32.3% to 4.2 mln tonnes in July-November. Thus, Egypt returned to the first place among the buyers of Russian wheat. Turkey decreased purchases of Russian wheat by 5.3% to 3.9 mln tonnes and moved to the second place in the list of importers. Under such conditions, traders constantly needed to form export lots, demand from them was high on the domestic market that complicated the work of other buyers of wheat.

- Weather conditions. Market participants had strong concerns regarding next wheat crop as winter wheat was planted in dry soil, the share of crop in poor condition as well as thinned out and no sprouting was record high at the start of wintering. Thus, some farmers decided to hold their grain until the prospects of new crop size would be clearer. They may sell wheat of the harvest-2020 in 2021/22 MY if unfavorable weather remains and condition of winter crop deteriorates.

The prices of 3, 4 grade and feed wheat reached 15000-20300, 14200-20000, 13300-19700 RUR/t СРТ correspondingly in the European part of Russia in November and early December. The prices were lower in Ural and Siberian FDs due to the remoteness from seaports, lower influence of export market and smaller demand from traders. Nevertheless, the prices were rather high at 14700-17600, 14000-16800 and 13000-17000 RUR/t СРТ. The prices of top and 1 grade wheat flour varied within 21000-28000 and 20500-27600 RUR/t EXW supported by the appreciation of wheat. At the same time, many millers informed about low profitability.

The upward trend dominated on the export market in the first half of the season. In the first ten-day period of December, the prices of 12.5% and feed wheat reached 255-260 and 249-254 USD/t FOB in Black Sea ports and 237-241 and 230-235 USD/t FOB in ports of Azov Sea. Traders were ready to buy milling wheat at 17500-19300 CPT-port of Black Sea and 17300-18200 СРТ-port of Azov Sea.

 
More complication? Or help?

On November 11, government offered to introduce 15 mln tonnes grain export quota in Russia during February 15 – June 30 period, and on November 30 there were information about the possible increase of the quota to 17.5 mln tonnes. At the same, this restriction had no significant influence on price, because most of the market operators did not expect the export volumes to exceed the quota volume in this period.

Also, in order to stabilize the domestic price for flour and bakery goods the Ministry of Agriculture developed a project to provide subsidies to milling companies with the help of which they it would be possible to recover part of the costs on wheat procurement. Millers had obtained a possibility to compensate up to 50% of difference between the current and 3-year average prices for grain (according to Federal State Statistics Service), adjusted considering the inflation. The decree is to come into force in March this year.

On December 9, 2020, Vladimir Putin the president of Russia during the meeting on economic issues criticized the delayed reaction on price rise for food products: “All instrument for price rise control, at least for these items, are known, it is only necessary to react in time. <…> But I expect from you not just offers on this topic, but specific measures and deadlines, and most importantly, there should be a result”.

On December 14, 2020, the Ministry of Economic Development and trade proposed to government the projects to implement 17.5 mln tonnes grain export quota during February 15 – June 30, 2021 and to implement export tax for wheat at 25 EUR/t within the quota and 50%, but not less then 100 EUR/t above the quota.

However, it should be noted that the market operators’ opinions regrading the reasonability of these measures differ.

“Perhaps at the moment this restriction will influence the activity of Russian wheat export because of higher price.  But I don’t think that it will be critical for Russian export in general. Firstly, there are contracts, which our domestic logistics is not able to cover, but now we will have time to fulfill all the contract obligations in time. Stocks of wheat in Russia are high, whereas export potential of Ukraine, Romania and France might exhaust, and then importers will have to buy our grain at offered price” – commented one of Russian traders. 

“These measures question the course of agri-export development. There are attempts to separate domestic prices for wheat from global. I believe that it can be possible if the export is closed at all only, but everyone understands that it is not possible. The country needs foreign currency. Moreover, the exports closure will push the agriculture sector for a decade back. The farmers will start to plant less, will give up on fertilizers. I’m sure that people, making such decisions, know what they do. Only that we, average people, do not understand the sense of this decision. If this really is a concern for people, the experience of 2015 should have shown that the implementation of wheat export tax by the key global wheat exporter will influence the global market conjuncture, which will cause price decline on the domestic market” – said one of the processors in Central FD.

“Last year global financial market bubble collapsed. The coronavirus was only a final force that broke the chain. There are two poles: since April of 2020 the US and China turned on the printing presses to help the markets to recover, but… The cash produced did not come to real sector. 85% of the money has blown the assets of stock and foreign exchange markets. In China as well as in the US the real sector started to go bankrupt. China, as we know, is separated into state sector (40%) and private sector (60%). This year private sector will be going down and China will be driven by state sector. How this is going to happen we will see by the end of the year, but still, it would be painful not only for China – for all of us. In the US, the situation is slightly better, because the share of state sector in the economy is not as high, but still there are many go bankrupt, the money printed blow the stock market and the real sector is under time pressure. The lack of money on the cash market of the global economy will influence the grain market as well. Russia has implemented the quota and taxes since February not without reason. Food prices will rise and everyone will be defending their local markets from high prices. If there is no turn-over money, there is nothing to plant, if there is nothing to plant – there is deficit of products” – said one of Russian traders.

Also, the market participants noted that the implementation of taxes in Russia will have negative impact on its reputation, accumulated over the years, as a wheat supplier. “Any government with incoherent, unpredictable policy automatically becomes unattractive for building of trade partnership, despite all the available resources” – noted on the market operators.

From December 11, waiting for this price regulation decision to be made export-oriented companies declined the bid prices for wheat in Black and Azov sea ports by 800-1500 RUR/t, then the domestic consumer also began to react on the measures taken. As a result, wheat prices in the European part declined by 800-2400 RUR/t in less than a week, and in Ural and Siberian FD – by 1000 RUR/t. Also, during that time the prices were under pressure of milling companies, which has formed the stocks before the New Year’s holidays and were able to lower the bid prices without fears of declining offers of raw materials.

GASC wheat tender on December 15 demonstrated the significant decrease of Russian grain competitiveness. Despite the fact that according to tender conditions wheat had to be delivered during February 1-15 of 2021, Russian traders calculated the risk of export tax, thus the offer prices were considerable higher than of competitors. For the first time since July Russia has lost Egypt tender. It should be mentioned that since the start of the season GASC bought 3.91 mln tonnes of wheatб 88% of which of Russian origin. Thus, Russia has lost its position on the main target market.

 
How we start the SH of a season?

Export restriction measures in Russia have certainly led to downward revision of Russia wheat export forecast by most of analysts, rise of global prices for wheat and higher export prices for Russian wheat. As a result, the bid prices for wheat from traders on the domestic market started slowly to return to pre-duty level. As soon as the country returned after the long New Year’s holidays there were new information about government preparing additional measures of price regulation on the domestic market. However, as before, this has mostly affected the prices on the global market and export prices instead of domestic market conjuncture. By mid-January export prices for wheat 12.5% protein and feed wheat in terms of deep sea ports delivery increased to 287-295 and 278-285 USD/t FOB respectively, and in terms of Azov sea ports delivery – to 253-260 and 244-250 USD/t FOB.

As of latest data, The Subcommission for Customs Tariff & Non-Tariff Regulation and Protective Measures in the Foreign Trade offered to increase export tax to 50 EUR/t since 1st of March. Furthermore, from 1st of July the duty will not be cancelled and the commission decided to work out and introduce an automatic and long-term mechanism for floating export duties calculation, taking into account current global prices.

According to information from National Commodity Exchange, on January 20-22 there were trading sessions for grain selling from Russian intervention fund, in which participated not only processors and livestock farmers, but also export oriented companies. However, experience shows that interventional tenders pressure the prices only locally.

While the full force is thrown to combat high prices, farmers’ problems are ignored. Even more, they are actually drawn as a villain of grain market, who thrive on millers, bakers and Russian people. But producers’ offers of fertilizers price regulation, PPP and POL are rather a cry for help and at the same time a warning about the forced decline of production and wheat quality in case of neglect of these measures.

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