Wartime food balance in Ukraine: Part 2.2 Formation of domestic consumption. Grains and by-products

2.2. Grains and by-products

Russia's invasion of Ukraine on February 24, 2022 disrupted functioning of agricultural enterprises and supply chains of raw materials, resources and finished products. Therefore, the provision of food to Ukrainians and the sufficiency of grain for domestic consumption turned to be the key issues.

The analysts of APK-Inform analyzed the impact of factors formed in Ukraine during the war on further trends in the distribution of grains in 2021/22 MY and made their forecasts for domestic consumption for the coming season.

Official statistics shows that as of February 1, 2022 the total availability of grain was almost 26.3 mln tonnes or more than 30% of total production in 2021. Given the consequences of Russia's military invasion (significant reduction in exports and damage to production infrastructure), we estimate that over 6.4 mln tonnes of grain were exported and prepared for exports in February-March 2022, 2.6 mln tonnes were processed and consumed domestically. Thus, as of April 1, the reported volume of reserves can be estimated at 17.3 mln tonnes.

To understand the availability of stocks for further export and processing, several key factors need to be considered:

- a significant part of stocks (20-30% depending on the crop) remains out of reporting, which increases the total availability of grain in Ukraine;

- on average, about 60% of grain stocks are formed directly at agricultural enterprises that allows the distribution of small batches over a larger territory of ​​the country than if they are consolidate at large elevators. This also raises the likelihood of maintaining stocks under the condition of hostilities;

- analysis of the structure of stocks as of February 1 shows that currently about 43% of volumes are concentrated in dangerous and relatively safe regions, and about 16% are in regions that remain dangerous as of April 10;

- analysis of the elevators shows that about 39% of storage facilities are located in dangerous and relatively safe regions, and 16% are in the most dangerous oblasts.

If stocks are in dangerous regions, it does not mean they are lost completely. However, this limits access to them, especially for export. And yet the risks of physical loss of some stocks still remain high.

Taking into account these factors, as well as in terms of limited exports, we estimate the grain losses at 5.8 mln tonnes in 2021/22 MY, which is 3.9 times higher than last season and 5-year average.

In addition, in the absence of active exports, the ending stocks in 2021/22 MY could be at a record 19.3 mln tonnes, but what share of this volume will be available for transportation and use is still a big question.

In 2022/23 MY, the volume of carry-over stocks may stabilize due to expected production decline and total 6.7 mln tonnes. However, the losses may still be high, partially due to the loss of some volume of stocks carried-over from this season.

Domestic consumption

Traditionally, a lion share of grain production in Ukraine was exported, while the average share of domestic consumption was not higher than 36% over the last 5 seasons. The average share of food consumption was about 6%, feed – 18%.

Higher share of export is typical for all major grains – wheat, barley and corn. For niche crops, the share of domestic consumption is higher than that of export.

We estimate domestic consumption of wheat at average 32% in a period from 2018/19 to 2020/21 MY. This season, it could reach 10.5 mln tonnes (+38% y/y due to possible growth in feed consumption and the expected increase in losses during storage in elevators located in hazardous regions), or 33% of wheat production in 2021. In 2022/23 MY, the domestic consumption is projected at 8.5 mln tonnes (-19% y/y), or 57% of the expected production (14.9 mln tonnes) and 42% of the total wheat supply (20.1 mln tonnes due to high carry-over stocks at 5.2 mln tonnes).

Domestic consumption of barley averaged 48% of its production over the last 3 seasons and ranged from 3.6 mln tonnes to 4.0 mln tonnes. In 2021/22 MY, domestic consumption of barley is expected at 3.8 mln tonnes (+6% y/y) or 40% of the crop volume. Next season, this figure is expected to decrease by 8% to 3.6 mln tonnes (76% of next crop, 63% of total supply).

Domestic consumption of corn did not exceed 6.4 mln tonnes for the last 3 seasons and averaged about 20% of its harvest. In 2021/22 MY, this figure can amount to 11.1 mln tonnes (+85% y/y due to expected growth in feed consumption and high losses in hazardous regions) or 27% of production volume. In 2022/23 MY, domestic consumption of corn is projected at 8.6 mln tonnes (-23% y/y) or 46% of the expected harvest (18.5 mln tonnes) and 28% of the total crop supply (30.8 mln tonnes due to high corn ending stocks in 2021/22 MY at 12.3 mln tonnes).

As for niche crops, the domestic demand for oats, millet and peas is covered by own production, but the buckwheat segment currently needs imports.

In the current season, domestic consumption of oats is estimated at 430 thsd tonnes (91% of crop production, 78% of total supply). In 2022/23 MY, with the expected production at 256.1 thsd tonnes (-46% y/y), oats domestic consumption is expected at 300 thsd tonnes (-30% y/y), which is 80% of the total grain supply (373 thsd tonnes).

Domestic demand for millet in 2021/22 MY may be 74.0 thousand tons (36% of crop production, 30% of total supply), and next season - 73.0 thousand tons (-1% to 2021/22 MY) ), which is 92% of the future harvest (256.1 thousand tons) and 43% of the total grain supply (373.4 thousand tons).

In 2021/22 MY, millet domestic consumption is estimated at 74 thsd tonnes (36% of the production, 30% of total supply). It is forecasted at 73 thsd tonnes in 2022/23 MY that will be 92% of the next crop (79 thsd tonnes) and 43% of the total supply (168.3 thsd tonnes).

Consumption of peas is expected at 150 thsd tonnes this season (26% of production, 24% of total supply). In 2022/23 MY, domestic consumption of peas is expected at 140 thsd tonnes (-7% y/y), which is 69% of the projected harvest (203.3 thsd tonnes) and 40% of total supply (349,4 thsd tonnes).

Domestic demand for buckwheat is projected at 103 thsd tonnes in 2021/22 MY, which is 3% higher than the harvest (106 thsd tonnes) and is 72% of the total supply (151.6 thsd tonnes) with expected imports of 14 thsd tonnes. In 2022/23 MY, buckwheat consumption may reach 95 thsd tonnes (-13% y/y), which is 80% higher than its projected production of 52.7 thsd tonnes and is 91% of the expected supply that includes 10 thsd tonnes of imported buckwheat.

Food processing of grain did not exceed 7% of the total production volume for the last 5 seasons. In 2021/22 MY, we expect that this figure at about 4%. Next season, it will be at 9% due to the expected significant decline of grain production to 38.9 mln tonnes (-55% y/y).

Flour

On the shelves of Ukrainian stores you can find different types of flour produced in our country, but still dominated by wheat flour, the share of which in total production is about 94%.

The dynamics of four production in Ukraine in recent years has been declining due to lower exports, low profitability, changes in gastronomic preferences of Ukrainians and population decline. Over the past 5 years wheat flour and wheat-rye flour production decreased by 37% and exports – by 76%.

Sources: SSSU, Customs Service

Given this downward trend, the issue of providing these products to Ukrainians is extremely important. With the decline of production, the capacity of flour mills remains largely unchanged. Moreover, over the last 5-8 years new mills have been built with modern high-tech equipment.  Therefore, to determine the production potential of flour, it is advisable to take the maximum achieved production figures. Over the past 5 years the maximum monthly production of wheat and wheat-rye flour in Ukraine totaled 228.5 thsd tonnes – up 1.4 times compared to average monthly figure in 2021 (96.2 thsd tonnes). Thus there is considerable potential for production growth.

From this point of view, the regional distribution of capacity of flour mills is also important. There is a certain unevenness here. In 2021 29% of flour production was provided by only two oblasts – Vinnytsia and Kharkiv. If the enterprises of Vinnytsia oblast are currently relatively safe, the Kharkiv oblast is in a zone of active hostilities with a high risk of escalation. But even under such conditions, enterprises in the Kharkiv oblast continue to produce flour.

In general, in 2021 the total share of production by enterprises concentrated in dangerous and relatively safe oblasts is estimated at 46% of total production in the country, and in the areas that remain the most dangerous - 28%.

When flour mills reach their maximum capacity, even with the complete shutdown of mills in the most dangerous oblasts (Donetsk, Zaporizhia, Luhansk, Kharkiv and Kherson), the monthly production volume will exceed 83% of the monthly average in 2021.

It is also important that in Ukraine there is a certain amount of flour production, which is not included in the main reporting. According to our estimates, taking into account the actual consumption of flour, this figure is about 35% of the values ​​provided by SSSU.

Taking into account migration processes and the departure of about 4 million citizens of Ukraine abroad, the domestic demand for flour is currently slightly lower. With the same specific official average monthly production achieved in 2021 (2.33 kg / person per month), the average monthly production should reach 86.9 thousand tonnes. When reaching maximum capacity, production volumes in relatively safe oblasts can be formed at the level of 140 thousand tonnes, which is 61% more. Such an increase will even allow for the export of flour, but if there are logistical opportunities.

For the formation of sustainable flour production under current conditions, the issue of raw material supply is important. At the maximum volumes of official flour production in relatively safe regions, the monthly demand for food wheat is estimated at 183.2 thousand tonnes, or 916.2 thousand tonnes before the formation of grinding batches of new wheat. At the same time, wheat stocks are distributed quite unevenly in terms of regions, which requires redistribution and reliable transportation of raw materials.

A certain limiting factor in increasing flour production is also the sale of bran. Taking into account the revaluation of flour production and the estimated yield of bran in flour production over the past 5 years, an average of 85% of the formed stocks of bran were exported. At the same time, if the production of flour systematically decreased, the dynamics of bran exports remained relatively stable. It is the export of bran in most cases provided a positive profitability of flour mills.

Source: Union “Millers of Ukraine”

Ensuring the sale of bran is critical, because the formation of their stocks at enterprises technologically does not allow to produce flour. The main importer of Ukrainian bran is Turkey, which bought an average of 90% of all export lots. Accordingly, due to the lack of shipments in ports due to military aggression by the Russian Federation, these volumes will remain at the enterprises.

GROATS

According to APK-Inform Agency, the volume of cereal production per capita in Ukraine is relatively stable and is estimated at about 4.9 kg / year. According to our estimates, in the first half of 2021/22 MY in Ukraine was produced 95.4 thousand tonnes of cereals (-2% compared to the same period last season), key positions in the ranking of producers took Kiev, Kharkiv, Vinnytsia, Dnipropetrovsk and Khmelnytsky oblasts, the total share of which in total production was 63%.

As already mentioned, feed consumption of grains accounts for a significant share of domestic distribution. During the war, this segment is also characterized by certain changes. The changes are primarily due to the regional structure of the livestock population. According to available statistical information, as of January 1, 2022, the main livestock was formed outside the regions that are currently the most dangerous. According to our estimates, in terms of conventional livestock, about 28% of the total number of farm animals are housed in dangerous and relatively safe areas. Accordingly, for the most dangerous regions, this figure is 12% of the total. It should be noted that livestock in dangerous areas does not mean its complete loss and will also need fodder.

On the other hand, it is advisable to analyze the regional distribution of feed production in Ukraine. From this point of view, the situation is somewhat more complicated. According to the SSSU, in 2021 the total production of feed for cattle, pigs and poultry amounted to more than 5.6 million tonnes. At the same time, imposing the military realities of today, it can be stated that about 32% of feed production is concentrated in dangerous and relatively safe areas, 11% - in areas that remain the most dangerous.

Regional distribution of animal feed production in Ukraine, thsd tonnes

The situation with the production of feed for pigs may be the most critical, as about 48% of these products were produced in dangerous and relatively safe regions. Poultry feed production, where only 4% was in the most dangerous areas, may suffer the least.

Under the current conditions, the diet of farm animals is expected to change, given the difficulties in obtaining meal and cake taking into account the reduced processing of oilseeds, as well as the presence of significant transitional residues of grain that can be used as concentrated feed. This is according to the results of the season may lead to the projected increase in feed consumption of grain.

According to our estimates, depending on the planting area and planting rate for different grains for the last 3 seasons in Ukraine, the total need for seeds for the next season was in the range of 2.1-2.2 million tons, which averaged about 3.1 % of the harvest and 2.9% of the total grain supply. We expect that in 2022/23 MY the need in grains’ seeds can increase to 2.1 mln tonnes (5.4% of the forecasted production, 3.6% of total supply), because it is possible to increase crops to pre-war period due to the return of lost areas due to active hostilities in these areas.

The need for wheat seeds of the current season in terms of the predominance of winter wedges in the structure of crops (97% of the total area under cultivation) decreased compared to 2020/21 MY by 6% to 1.3 million tonnes (70% of the total seed stock of grains), in 2022/23 MY this figure is expected at 1.4 million tonnes.

The need for barley seed material for the harvest of 2022 is estimated at 390.0 thousand tonnes, which is 20% lower compared to 2020/21 MY (490.0 thousand tonnes). In 2022/23 MY, the demand for grain seeds may amount to 470.0 thousand tonnes (+ 21% to the 2021/22 season).

Due to the possible reduction of the planting areas under corn in 2022 compared to 2021 by 43%, the seed fund of this crop in the current season is projected at 80.0 thousand tonnes (-47% by 2020/21 MY). In 2022/23 MY, with the expected end of the war in Ukraine, the need for grain seeds for next year's harvest may reach 130.0 thousand tonnes (+ 63%).

The seed fund of cereals (total oats, millet, buckwheat) in 2021/22 MY is estimated at 26.0 thousand tonnes, which is 35% lower compared to previous season (40.0 thousand tonnes), in 2022/23 MY - 39.0 thousand tonnes (+ 50% to the current season).

It should be noted that the need for seeds for wheat and barley is covered by farmers mainly due to varieties of domestic selection, while for corn crops is characterized by a significant share of varieties of imported selection.

The key factors for the further formation of domestic consumption of cereals are currently the following:

• further development of war on the territory of Ukraine;
• establishing logistics of both raw materials and finished products within the country, and ensuring exports and imports in critical segments;
• the level of realization of the capacity capacity of grain processing enterprises in accordance with the current military situation;
• formation of state support for the grain processing, which even in the pre-war period had rather low efficiency indicators;
• formation of demand in the livestock industry;
• the level of risk of damage of grain storage facilities;
• further activity of migration processes.

In general, under the current conditions, significant problems with providing Ukrainians with grain processing products are not expected yet. Moreover, the available fodder base is sufficient to support a functioning livestock industry. But military risks remain very high, and the situation could change at any moment.

Wartime food balance in Ukraine Part 1. Formation of planted areas and production structure

Wartime food balance in Ukraine: Part 2. Formation of domestic consumption 2.1. Oilseeds and by-products