Surprises of quarantine seasons on the grain market of Black Sea region*

Source

APK-Inform

15961

During the global quarantine, the grain market faced many unexpected challenges that had to be overcome. These include export restrictions in the key countries, a statement of the vulnerability of the global logistics system, a significant rise in food prices, and traditional climate challenges, the impact of which is only increasing. Taking into account the dented world economy and the persistence of rather large pandemic spots, the grain market awaits many more surprises in the coming seasons. This article will cover the preliminary results of the quarantine seasons and expectations for the key countries of the Black Sea region.


 

How unprecedented is the current price growth? 

The key phenomenon of MY 2020/21 is a significant growth of prices of main grain crops despite a quite stable production. For example, the production of US wheat declined by 5% in 2020/21 MY, while the spot prices on FOB basis (Gulf of Mexico) increased by 42% over the season. In the European Union, wheat production fell by 9%, while prices rose by 34%.

Generally, the current situation is not unprecedented. The price dynamics of 2010/11 MY turned out to be the most similar to the current one over the past ten years. According to USDA, wheat production in both the US and the EU decreased by only 2% in 2011/10 MY. Nevertheless, the prices in the US increased by 54% from the beginning of the season to the peak period, and in the EU they grew by 65%. The prices in absolute terms were much higher than the current ones.

It is noteworthy that in 2010/11 MY, a significant reduction of wheat production was observed in the Black Sea region. According to APK-Inform, Ukrainian wheat crop declined by 19% in 2010, Russian wheat - by 33% that could influence on the global price dynamics to a greater extent than the changes in balances in the US and the EU. At the same time, the common share of Ukraine and Russia in world wheat exports did not exceed 6% in 2010/11 MY. In 2020/21 MY, a somewhat different situation is observed. The share of Russia reached 19%in the world exports, which ensures the country's leadership among the key suppliers. The share of Ukrainian exports is estimated at 9%. Thus, the influence of the Black Sea region on the global market situation can hardly be overestimated.

The key peculiarity of the current season is that the prices were growing despite the increase in production and exports in Russia. According to our estimates, in 2020/21 MY, Russia produced 85.9 mln tonnes of wheat, which was the second largest harvest on record and was up by 15% from the previous season. At the same time, the export potential is estimated at 36.0 mln tonnes, up by 6% year-on-year. The gross production of grains increased by 10% in Russia in 2020/21 MY, and the export potential is almost 12% higher.

In Ukraine, a very different situation was observed in 2020/21 MY. The production of wheat decreased by 12% compared to the previous season, and the export potential was down by 18%. The decrease in export potential was mainly due to an unstable demand and the need to compete with Russian wheat on the key markets. As a result, with the boundary volumes of wheat exports specified in the memorandum at the level of 17.5 mln tonnes, we estimate Ukrainian wheat export at 16.8 mln tonnes in 2020/21 MY.

In general, Ukraine cut grain production by 14%. The export of grain will decline by 18% mainly due to smaller wheat shipments.

Food grain was not the most expensive

Another interesting, but also not unprecedented feature of the season was the positive spread between prices of corn and milling wheat in Ukraine. Back in September 2020, the offer prices of Ukrainian milling wheat were 40 USD/t higher than the prices of corn on FOB basis. As of early June 2021, the prices of corn were 33 USD/t (or 12%) higher. The bid prices of corn in hryvnia terms (CPT-port basis) turned out to be 15% higher than the prices of wheat.

As already noted, the current situation was not unique and was observed in Ukraine in the off-season in 2010/11 MY and 2015/16 MY. Moreover, the production and export potential of corn remained stable in 2010/11 MY, and there was almost twofold increase in production and a threefold increase in exports in 2011/12 MY , which put pressure on the prices, but not as much as in the wheat segment, where the growth was smaller (+32% and +26% correspondingly). The prices of corn increased by the end of 2015/16 MY due to lower production and exports, but the growth was quickly offset by higher crop in 2016/17 MY.

Noteworthy is that the shift of the transition point of the spread between the prices of corn and milling wheat to positive values ​​happened earlier. In 2010/11 MY, the prices of these commodities equalized by mid-June 2011. Then in 2015/16 MY, the transition point shifted to the first ten days of May. In 2020/21 MY, corn became more expensive than milling wheat by the end of March 2021. The positive spread in 2015/16 MY lasted for 19 weeks until the start of the harvesting campaign. This season, this period can extend. As of June 18, the positive spread has been forming for 13 weeks. Taking into account the prevailing weather conditions, the mass harvesting campaign can be shifted 2-3 weeks later. Thus, it is possible that we will see a radical change in the situation in 12-15 weeks.

The volumes of trade during the period of high prices are of great importance. In 2015/16 MY, during the period of positive spread, about 15% of the total export volume was exported. In 2020/21 MY, this period accounts for about 32% of the projected export potential. It is estimated at 12% for the remaining 4 months of the season (June-September). This requires the formation of competitive prices, especially given the active supply of South American grain to the global market. But under the current conditions, the price situation in Ukraine is mainly formed due to reserved farmers selling and unstable demand on the foreign markets.

A bit about reserved selling…

The active growth of grain prices influenced the sales strategy of farmers already at the start of the season. Sales are carried out at a moderate pace for almost the entire season in anticipation of higher prices. The difficulty in fulfilling forward contracts, primarily for corn was the main surprise of the season. In addition to the high prices (much higher than it was specified in the forward contracts), the situation was significantly affected by a sharp reduction of corn yield in key regions as well as by crop losses due to the drought.

As a result of the timely reaction of market participants, holding public discussions and realizing the need to maintain Ukraine's status as a reliable food supplier, in most cases, it was possible to agree on the fulfilment of forward contracts. But the export trade remained rather low in September-January 2020/21 MY. Traders were forced to raise their bid prices in order to attract large-tonnage grain lots and fulfill the signed contracts. As a result, the bid prices of wheat and barley (CPT-port) increased by 72% and 59% respectively from the beginning of the season to the period of peak prices ​​(end of January). Corn prices peaked in early May 2021 and were 40% higher than in early October and 63% higher than in early July.

Unexpected demand

Looking at the demand the current season also brought many surprises for Black Sea Market. Russian and Ukrainian grain deliveries were characterized by losses of the positions on the main markets and significant rise of deliveries to atypical ones.

First of all, we should note a considerable growth of corn and barley import by China. If by the end of 2019/20 MY according to the USDA China imported slightly over 7.5 mln tonnes of corn, in 2020/21 MY it is expected to increase to 26 mln tonnes (up 3.5 t.). in 2021/22 MY the import is also expected to reach 26 mln tonnes, but it is possible that it might be further increased. In July-May of 2020/21 MY Ukraine exported to China around 8.4 mln tonnes of corn which is more than 32% of the import projected and nearly twice higher year-on-year.

Also we should note that EU countries, main buyers of Ukrainian corn, have considerable declined the import in the current season. The decline of deliveries to Netherlands and Spain has compensated 78% of deliveries growth towards China. Of we consider the decline of deliveries to such key markets as Egypt and Turkey, there is completely different picture: higher demand from China managed to compensate only 73% of the total demand decline from other countries.

Deliveries of Russian corn to China also increased, however not that much compared to Ukraine. In July-April of 2020/21 MY Russia exported more than 262 thsd tonnes compared to 98 thsd tonnes year-on-year.

On the market of barley there were also higher demand from China. If in 2019/20 MY the total purchases reached 6 mln tonnes, in 2020/21 MY they are expected to rise to 9.6 mln tonnes and in 2021/22 MY – to 10.6 mln tonnes.

In July-May of 2020/21 MY Ukraine exported to China over 2.8 mln tonnes of barley, which is 2 mln tonnes more year-on-year. At the same time the deliveries have considerably declined to Saudi Arabia – by 934 thsd tonnes to nearly 334 thsd tonnes compared to 1.269 mln tonne in the same period last season.

Russia did not export much barley to China and in July-April the deliveries totaled only 82 thsd tonnes. Herewith, in the same period last season there were not deliveries to China at all. At the same time there was higher export of Russian barley to Saudi Arabia – to 2.4 mln tonnes, which is up 731 thsd tonnes y-o-y and almost compensate lower deliveries from Ukraine.

The situation on the market of Black Sea wheat is even more interesting. The main surprise was a higher demand from Pakistan, which traditionally either fully covers the domestic consumption or export the grain. According to the USDA in 2020/21 MY Pakistan can import up to 4 mln tonnes of wheat. Last time the significant import volumes occurred in 2008/09 MY (3.1 mln tonnes). At that MY domestic production declined by 2.3 mln tonnes. In the current season according to experts, wheat production in Pakistan can increased by 600 thsd tonnes y-o-y. But lower carryover stocks stimulated larger import.

In 11 months of 2020/21 MY Ukraine exported to Pakistan 1.4 mln tonnes of wheat. Another nearly 1.6 mln tonnes were exported from Russian in 10 months of the current season. Thus, around 75% of the forecasted import was covered by only two countries from Black Sea region.

Also, it should be mentioned the changes in deliveries to main markets – Egypt and Indonesia. In the reporting period Ukrainian export to Egypt declined by 0.36 mln tonnes whereas Russian in 10 months exported 1.5 mln tonnes more. The forecast of Egypt wheat import remains stable – 13 mln tonnes in 2020/21 MY against 12.8 mln tonnes in 2019/20 MY. 

Indonesia traditionally is a key target market for Ukrainian wheat and shares leadership position with Egypt. In 11 months of the current season Ukrainian wheat export to Indonesia decreased by 1.3 mln tonnes to 2.4 ln tonnes only which is 24% of the import potential of the country (out of 10 mln tonnes). Russian wheat deliveries to Indonesia are nearly absent.

Besides, there are fewer deliveries of wheat from both Ukraine and Russia to Turkey. During the reporting periods Turkey decreased import of Ukrainian wheat by 0.6 mln tonnes and Russian – by 1.4 mln tonnes. At the same time, total import of grain by Turkey in 2020/21 MY is expected at 9 mln tonnes which is 1.8 mln tonnes lower compared to 2019/20 MY.

Other surprises

Apart from abovementioned, there are other surprises on the grain market during the current “quarantine” season.

For example, in Ukraine there is surplus of grain-cars, which was an unpleasant surprise after long years of efforts to form rolling-stock for grain deliveries to ports. Herewith, increase of private rolling stocks share led to competition in the segment which pressured the rate quotation.

In Russia the export tariff regulation became kind of surprise in the SH of the season, aiming to stabilize prices on the domestic market. This is a challenge both Russian traders and importers had to take.

Global market also was saturated with surprises. In particular, week long blockage of  the Suez Canal demonstrated vulnerability of the global logistical system, caused the necessity to take into account such risks and formed freight rate volatility. Changes in geopolitical and trade vectors of policy of the USA after the presidential elections were although expected, but still bring a lot of uncertainties into commodities trade. Many global and local factors will be effecting grain market in a future season.

Prospects

Speaking of the prospects in a future season, first of all we should mention positive expectations of new crops of grains ans pulses, which in total in Ukraine and Russian are expected to reach 199.4 mln tonnes against 198.4 mln tonnes in a previous season. At the same time, Ukraine is expected to increase grain production, and Russia to slightly decrease. But the total export potential in 2021/22 MY can be elevated by 7% and reach 99 mln tonnes against 92.7 mln tonnes, forecasted for the current season.

Despite the production and export stability, the reporting markets are expecting many suddenness in a new season:

- Agroclimatic surprises, formed in spring of 2021, which leave the question of future grain crop quality unsettled, have shifted the harvest campaign to a later phase and would have a significant influence on the trading activity in the FH of 2021/22 MY.

- Launch of the program «Green Deal» can bring changes to the formation of demand in the EU.

- Land market opening in Ukraine can bring unexpected changes to farmers’ trade strategy.

- The tariff regulation of the grain export market in Russia is also likely to change depending on the volume and quality of the new crop.

- An unpredictable China can both keep the upward trend in imports of grain crops and suddenly reduce purchases.

- New strains of coronavirus and expected new waves of pandemic will also take their toll on grain trade.

In general, all market participants of the grain market will see an interesting season, full of challenges, overcoming which, we will all become more experienced, wiser and more prepared for new surprises.

* Based on Andriy Kupchenko's speech at the XX International Conference Grain & Maritime Days in Odessa 2021

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