Grain export forms significant part of currency returns of Ukraine. According to Customs Service, export returns totaled 49.3 bln USD in 2020, including 11.7 bln USD (24%) from export of grains, oilseeds and grain by-products. Ukraine will cut export of grain by 17% in 2020/21 MY due to lower crop. It influenced dynamics of grain prices and transportation tariffs.
Export structure, seasonality of transportation and regional distribution
Corn, wheat and barley are the key export grain crops. Their share is 99% in grain export and 89% in overall supply including rapeseed and soybean.
Usually, dynamics of export shipments of major grain crops is quite smooth during the season due to mass supply of wheat and barley in the first half of season and corn in the second half of MY. The average monthly export volume was 4.58 mln tonnes in 2019/20 MY, and 4.93 mln tonnes in the first half of the season.
The situation is different this season, and the second half of the season will be less productive. The average monthly grain export volume totaled 4.28 mln tonnes in July-December. It declined to 4.04 mln tonnes over July-January. Ukraine will export about 16.9 mln tonnes of major grains in the next 5 months, or about 3.4 mln tonnes per month.
As to the formation of trade flows inside of the country, more than 60% of main exporting crops is produced in regions located far away from ports. It requires transportation of large volumes by railways.
Many producing regions suffered from drought in 2020 that resulted in lower stocks of main crops. According to official data, as of December 1, 2020 common stocks of wheat, barley and corn in Cherkasy and Kirovohrad oblasts was 45% lower compared to the last season. Stocks declined by more than 30% in Poltava and Vinnytsia oblasts, by 28% in Kyiv oblast and by 27% in Dnipropetrovsk oblast. Overall stocks was 26% lower in TOP-10 oblasts that cut volumes for railway transportation from remote regions to ports.
Formation of price trends
Talking about price dynamics, we need to analyze a spread between prices on the domestic market and bid prices in ports. There are four limit options here:
- purchase on the domestic market at minimal price and sale in port at maximal price;
- purchase on the domestic market at minimal price and sale in port at minimal price;
- purchase on the domestic market at maximal price and sale in port at maximal price;
- purchase on the domestic market at maximal price and sale in port at minimal price.
For each option, its own spread is formed. It will be maximal in the first case and can be even negative in the last case.
The analysis of average price spread for corn purchased in Kyiv oblast and sold in deep-sea ports shows significant decline of figures this season. The average spread was 702 UAH in July-February of 2019/20 MY. It decreased to 462 UAH in July-February of 2020/21 MY (-34%). This is unlikely to cover logistical costs that pressures the prices on the domestic market.
Formation of logistical element amid competition
The current logistics situation is quite complicated. Amid sharp decline of the share of transportation by JSC «Ukrzaliznytsia» cars (to 10%) the market is filled out by private cars. Currently, as of the most modest estimates, there are 10-12 thsd private cars, even in a high season. As a result, last quarter the grain car tariffs fell by 70% to 150-180 UAH/day in February (as of Rail.Insider). At the same time, the grain car rental price does not cover the expenditures for its maintenance and repair. Before 2021/22 MY it is necessary to carry out scheduled repair of 4580 grain cars (75% of them are JSC «Ukrzaliznytsia» cars), and by the end of the year - 11 thsd cars.
The peculiarity of this situation is the fact that now the freight owners are the largest players on the market, whose market share is over 30%. The main goal of the freight owners is to transport their own produce, and while selling grain the sufficient number of grain cars is released to enter already surplus market. Considering the high cost of cars layover, logistical element of transportation turns negative (sometimes below railways tariff) and can drop below 10 USD/t when transported even over 500 km.
If we estimate the supply of private fleet of grain cars in the SH of a season, first of all we should note the decrease of delivery of main grains by largest exporters, which are the main holders of private fleet. According to APK-Inform estimates in July-December of 2020/21 MY TOP-10 companies exported around 45% of total external deliveries of wheat, barley and corn. Previous season it was 43%. Moreover, total export of these grains in the FH of the season amounts to 57% out of forecasted export potential, whereas last season - 54%. Thus, total volume of wheat, barley and corn to be exported by TOP-10 companies in January-June of 2020/21 MY can reach around 8.7 mln tonnes against 10.7 mln tonnes last year. Respectively, the car fleet, that provided effective transportation of export products last season can be not in demand, which will enhance the competition and will pressure the tariff rates.
Now JSC «Ukrzaliznytsia» conducts operative activities to return the freight base to its own grain cars, trying to find clients (long-term contracts) and offer the market various concessions (cancelation of inactive stations). There is a potential for return - in 2017-2019 the railways lost around 1 mln tonnes of grains transportation at 200-500 railroad haul.
Currently market operates in debt, when the cars element is not included into transportation cost. The grain cars operations are becoming unprofitable, there are delays in rolling stocks repairs and moving of parts for rolling stock with higher profitability. These can make the market of cars scarce in a very short time, but more dangerously - it can become deficit with the nominal surplus of grain cars.
As of the beginning of February the average price spread in corn is 500 UAH (in Kyiv oblast) with the settlement transportation rate ranging 15-17 USD/t (around 417-473 UAH). Thus, almost all the difference goes to pay the logistics. Taking into account the operation of freight carriers at extremely low tariffs, shortly we should expect the bid price decline on the domestic market.