Corn games-2021: how long will prices rise on Ukrainian market?




For the second year in a row, instead of the traditional decline of corn prices ahead and at the beginning of the new season, the players of the Ukrainian grain market are facing their growth. In 2020/21 MY this was caused by a growth of exchange and physical markets, primarily due to a poor harvest of all grain and oilseeds in Ukraine and not only, which led to a wave of defaults and questioned the country's reputation as a stable exporter on the global stage. On the contrary, the corn crop will be a record high this season.

Delayed records

Despite the fact that most experts expected a record corn production in Ukraine and in the world long before the beginning of 2021/22 MY, the prices remained quite high. The bitter experience of last year taught us to be skeptical about such optimistic forecasts (especially against the background of abnormally hot and dry weather in most of Ukraine in the second half of summer).

Along with the approaching season, the desired records of corn production in Ukraine became more and more real. Paradoxically, but it did not caused a sharp drop in prices. Today, APK-Inform forecasts corn crop at 37.8 mln tonnes, USDA at 38 mln tonnes, while the estimates of some local experts reach 39 mln tonnes. Therefore, the production may significantly exceed the maximums of 2018 and 2019 – 35.8 and 35.9 mln tonnes correspondingly. Such production volumes will allow Ukraine to ship about 30-31.5 mln tonnes of grain to foreign markets and to regain its traditional share on the world market.

Such expectations should pressure the prices, but we should not forget about the previous season of high prices, periodic surges of crude oil prices and systematic worries about weather conditions and production prospects. The situation was very complex and was compounded by high temperatures and lack of precipitations in Europe and the USA as well as a large gap in estimates of South American corn production. While the forecasts of safrinha corn of the harvest-2021 were melting in Brazil, Ukrainian traders seized the opportunity and increased the export of corn by 2.3 times y/y to 1.4 mln tonnes in July-September 2020/21 MY.

Even during a period of declining trade due to a switch to early crops, corn prices were supported by substantial appreciation of prices of wheat and barley.

When the time to perform forward contracts came, this year, traders again had to work hard to find the volumes required. It was because of the difficulties with the formation of export consignments due to the delayed start of the harvesting campaign and its slow progress, particularly in September amidst rains. However, despite the speed up of the harvesting campaign in October on dryer weather, it did not allow to compensate the significant delay. Thus, the process continued growing.

As of November 11, Ukraine harvested 28.1 mln tonnes of corn throughout 4 mln ha or 73% of the plan compared to 78% (4.27 mln ha) in 2020 and 87% (4.33 mln ha) in 2019.

In addition, the dependence on external factors and the correlation of the Ukrainian market with the global arena is becoming more pronounced, and here there are more than enough supporting factors. But, if you look closely, they are not so unambiguous. But first things first…

Initial support

The EU is one of the leading importers of Ukrainian corn. The weather impact on its own corn production supported the Ukrainian market. In 2020/21 MY the EU covered more than 50% of its corn import with Ukrainian grain. For comparison, the share of Ukrainian corn was 30% in Chinese imports, 25% – in Egyptian, 20% – in Iranian. Thus, when the prospects of EU corn crop began melting, the prices found the support. Particularly, Stratégie Grains cut the forecast of EU corn production by 1.4 mln tonnes m/m to 64.9 mln tonnes for 2021/22 MY, the IGC – by 0.8 mln tonnes to 68.4 mln tonnes, the European Comission – by 2.2 mln tonnes to 68.8 mln tonnes.

Another good reason is the expected preservation of strong imports by China, which was the largest buyer of Ukrainian corn in 2020/21 MY. In September, China purchased 3.5 mln tonnes of corn (according to the customs data), up by more than 3 times compared to September 2020. It has bought 24.9 mln tonnes of corn since the beginning of this year (+275% to January-September 2020). In addition, CASDE lowered its forecast for corn harvest in China in 2021/22 MY to 271 mln tonnes, while domestic consumption may reach 290.7 mln tonnes, up 3% y/y.

Further, there were the deterioration of conditions of US corn crops and a 7 years low stocks at 31.4 mln tonnes (against 48.8 mln tonnes a year ago). The delay of corn planting in Argentina and the projected impact of La-Niña in winter period, which could reduce the production potential in South America. Additional support came from the high prices of Brazilian corn, despite the forecast of record crop in 2021/22 MY, and low pace of its export. Anec estimates that only 2.6 mln tonnes of Brazilian corn were shipped in September, slightly more than 2 mln tonnes were exported in October compared to 4.53 mln tonnes in October 2020.

The icing on the cake was the rise in crude oil prices following a significant surge in gas prices in Europe. Together with high inflation, it stimulates demand for biofuels.

Add to this a significant increase in the cost of the railway and road transportation and an increase in tariffs (including drying) at elevators in Ukraine amidst the sharp rise in prices for gas and other energy resources. In addition, grain comes with excess moisture this year (18-30%, according to most market players). Therefore, farmers are in no hurry to harvest corn, hoping for a decrease of moisture content directly in the fields. Thus, the number of offers is limited on the domestic market, while the demand is firm. The situation is the same in the EU, while the corn prices are rising in China due to rains and increased drying costs.

In the first half of October, the bid prices of corn increased by another 250-300 UAH/t to 7650-8000 UAH/t CPT-port. Some traders announced even higher bid prices in order to buy grain urgently and avoid ship downtime and demurrage, which increased significantly due to a sizable appreciation of freight rates. In deep-sea ports, the offer prices of corn were announced at 275-280 USD/t FOB (delivery in late October - early November) and 277-285 USD/t FOB (delivery in November-December).

However, this is significantly lower than the price highs of 2020/21 MY that makes farmers reserved sellers. Moreover, corn was traded at prices higher than 2-grade wheat for almost the entire second half of the previous season (the difference reached 1000-1200 UAH/t at the beginning of June 2021). Therefore, when the price of milling wheat crossed 9000 UAH/t CPT-port, many farmers began to hope for even higher prices for corn.

Operating for a fall

Although it is a long way to a new corn rally-2020, this situation had a negative impact on the competitiveness of Ukrainian corn on the global market. Thus, since mid-October price rise was moderate and the bid/offer price spread has widened significantly.

Besides, import of corn by the EU since the beginning of 2021/22 MY is minimal for last 5 years (according to European Commission by October 24 import of corn totaled 4.1 mln tonnes compared to 5.4 mln tonnes last year). At the same time, China National Grain & Oils Information Center (CNGOIC) reported that in the current year China will import 20 mln tonnes of corn (29 mln tonnes in 2020) and the government left the tariff quota for corn import in 2022 at 7.2 mln tonnes.

Moreover, further price rise was limited by faster harvest of late grains and oilseeds and beginning of planting in Norther Hemisphere due to dry weather conditions and favorable rains for planting in South America.

Owing to the fast planting campaign, Brazil made up for initial delays and by the end of October less than 30% of first crop corn area (4.38 mln ha) remained to be planted, whereas by the same time last year 58% of the grain was planted (out of 4.35 mln ha, according to Safras&Merсado). Also, the prices were under pressure of forecast of record production of corn in Brazil in 2021/22 MY (116.7 and 118 mln tonnes according to Conab and USDA respectively).

The arrival of the new crop of US corn on the market also effected the market, considering that the harvesting campaign remained high and the production of the grain in 2021/22 MY can become the second largest in history (382.6 mln tonnes according to USDA forecast). At the same time, ethanol stocks in the USA as of the beginning of November reached 5 weeks maximum – 20.13 bln barrels.

Moreover, as is often the case, the EU corn production estimates have revised upward. In particular, Stratégie Grains, owing to higher corn yields in France, Germany, Poland, Bulgaria and Romania, increased its forecast by 2.6 mln tonnes to 67.5 mln tonnes. USDA analysts increased the forecast to 67.9 mln tonnes – maximum in 7 years.

The same situation could be observed among the buyers on the domestic market of Ukraine – due to higher supplies the bid prices were increasing moderately and there were attempts to lower them. But logistics problems (especially with railways transportation caused by lack of grain-cars) prevented price decline as they again have regained relevance while securing export of export production. Perhaps, in such conditions the restrain of selling by farmers is not a bad?...

Export and foreign exchange earnings

Despite the last year crisis, Ukrainian farmers had harvested third largest corn crop which totaled 30.3 mln tonnes with the average yield at 5.62 t/ha which is only 16% lower compared to 2019 result. This secured the export at 23.9 mln tonnes and allowed Ukraine to move Brazil from the position of third global largest exporter of corn, where poor harvest led to decrease in export to 17.5 mln tonnes, although carry-over stocks increased significantly.

By the end of 2020/21 MY Ukraine exported 23.9 mln tonnes of corn (-17% y-o-y). China was a leading importer of Ukrainian grain with the share at 36%. The Netherlands was the second largest importer (11%) and Egypt – third (10%). The EU in general imported 7.4 mln tonnes of Ukrainian corn (compared to 10.4 mln tonnes in 2019/20 MY).

In September export of Ukrainian corn totaled 165.6 thsd tonnes for $42.2 mln, which is 5.6 times higher y-o-y in volume and 9.4 times higher in monetary terms.

October export volumes are less optimistic and totaled 895 thsd tonnes whereas in 2020 and 2019 export totaled respectively 1.8 and 2.3 mln tonnes. The EU remains the leading importer, which imported nearly half a million tonnes of corn from Ukraine. Looking at the separate importing counties Spain, Egypt and China are the TOP-3 importers. However, in monetary terms the situation is much better – the income out of 1 mln tonnes of corn, although was 10% lower compared to September figures, was 34% higher than in October 2020.

What comes next?

Despite the record production of corn, Ukraine this year will come down from being third to its traditional fourth place among global exporters, however its share will increase to 15.5%.

The USDA November Report had bearish effect on the sector (due to upward revision of global production and stocks of corn), which was counter-balanced by domestic market conjuncture and further increase of line-ups, and thus by traders’ need urgently cover their positions on previously concluded foreign economic contracts in order to avoid demurrage. So after another attempt to lower the prices based on the higher number of offers and lower corn futures on the global markets, prices for corn in Ukrainian ports are growing (especially on a spot-market). Maximal bid prices reach 8`100-8`150 UAH/t CPT-port and potentially can continue rising due to growing prices for wheat and barley. Also, the prices are supported by active purchases of large batches of Ukrainian corn by Turkey and China, which despite negotiations still has not decided on larger imports of corn from the US in terms of previously signed trade agreement.

In general, global S&D of corn in 2021/22 MY is expected to be less tight and production of South American corn reach a record high due to larger production in Brazil and Argentina, which will put pressure on prices. However, planting of corn in Argentina remains slow (according to Buenos Aires Grain Exchange by November 10 planting was 29% complete (+1% w-o-w) against 31% last year and 38% average for 5 years). Moreover, there is growing concern about the negative impact of La Niña on the development of corn and soybeans in winter.

The balance of the European corn, despite the production growth, remains to be tight. However, we should mention that this year, along with the growing domestic consumption and import, the competition for this market will also intensify (due to the recent abolition of import duties on US corn). Also, we should understand that for some importing countries the prices will be more important than the GM status of the grain. And in general, the growth of domestic production of corn in importing countries is worrisome.

In terms of increasing export potential of corn on the global market (due to expected growth from Brazil – from 17.5 to 43 mln tonnes, Argentina – from 38.5 to 39 mln tonnes, Russia – from 3.9 to 4.5 mln tonnes and the EU – from 3.6 to 4.4 mln tonnes) the necessity to preserve the competitiveness of Ukrainian corn is becoming even more urgent.

Besides, high prices and limited supplies owing to increase of feed wheat share on the market (as well as its price) have already led to lower demand from feed producers on corn. This situation is relevant not only for Ukraine, but also for the EU (where feed wheat production is increasing) and China. The USDA forecasts China import of corn in 2021/22 MY at 26 mln tonnes compared to 29.5 mln tonnes last season, and according to other experts will not exceed 22 mln tonnes.

Further on, the situation can be exacerbated by an increase in the corn of corn production in the EU, the US and Ukraine due to high fertilizer prices. Altogether these will be limiting active price rise in short term perspective. At the same time many global experts suppose that in the future this situation can lead to reorientation of farmers to production of less fertilizer-demanding crops, including barley and sunflower seeds (according to FranceAgriMer) or encourage American farmers to grow soybeans. How this situation will end in Ukraine, we will find out soon.

The harvesting campaign and forward contracts conclusion by Ukrainian traders remains the key issues, as well as further growth of global energy prices and their impact on all sectors. Currently crude oil prices are recovering, however the uncertainty regarding the demand on the oil remains relevant in terms of intensifying quarantine restrictions due to COVID-19 pandemic. The USA have stabilized ethanol production at the same time the decrease of its stocks supports the prices. Logistics in Ukraine has somewhat improved and there is a gradual decrease of rental rate for grain cars due to the measures taken by Ukrzaliznytsia, and the rush demand should weaken somewhat in early December. However, we should not dream about the stable price trends in exports.

By Anna Tanskaya