Wheat reality: forced export to the EU

Source

APK-Inform

3400

Production

In 2022, the minimum wheat crop for the last 10 years was harvested in Ukraine, which is estimated at 19.4 mln tonnes in net weight. This is 40% less than in 2021. The reduction of the harvested areas due to the occupation of territories and the physical inaccessibility of fields due to mining and ammunition contamination as well as active hostilities were the main reason for such a significant production decrease. As a result, the harvested area is estimated at only 4.7 mln ha against 7.1 mln ha in the previous year (-34%).

Under the shortage of fertilizers and fuel as well as a significant increase in the cost of all resources, the yields also decreased, but not as significantly as it was expected in the spring. The average wheat yield in 2022 is estimated at 41.2 c/ha, which is only 9% lower than in 2021 and even 8% higher than in 2020.

The data on wheat production does not include figures for Luhansk, Donetsk, Zaporizhzhia and Kherson oblasts, where active hostilities are currently taking place. At the same time, in 2021, the total share of these oblasts in wheat production reached 23%, even with active hostilities in the territory of Donetsk and Luhansk oblasts. Moreover, Zaporizhzhia oblast is traditionally among the leaders of wheat production, where over 2 mln tonnes were collected in recent years. Of course, in the territories of these oblasts controlled by Ukraine, wheat was harvested and formed the overall supply and demand balance, but it is very difficult to estimate these volumes at the moment.

The most significant reduction in wheat production was recorded in the frontline regions. Thus, in Kharkiv oblast, wheat crop decreased by 61% y/y, in the Mykolaiv oblast by 46%, in Odesa oblast by 37% and in Dnipropetrovsk oblast by 34%. These oblasts, together with Zaporizhzhia and Kherson, form the TOP-6 regions of wheat production in Ukraine, which together formed 46% of the total wheat production in the country in 2021.

The decrease in wheat harvest in the most dangerous regions was partially compensated by the increase in production in the western regions. In particular, wheat crop in Khmelnytskyi oblast increased by 12% y/y, in Volyn oblast by 16%, in Zakarpattia oblast by 28% and in Ivano-Frankivsk oblast by 36%. However, this increase is insignificant (373.5 thsd tonnes in total for the 4 specified oblasts) and could not fully compensate for crop losses even in one of the front-line oblasts.

Quality

Due to the above-mentioned reasons, it was quite difficult to assess the quality of wheat crop this year. SGS specialists, despite the danger, managed to collect enough information to form a traditional quality map.

In general, according to the results of the analysis of the collected samples, there is no significant decrease in the quality of wheat in 2022, and some indicators even showed some improvement. For example, the average natural weight for the examined samples was 779 g/l, while it was 771 g/l in 2021. Obviously, the lack of information from Luhansk, Donetsk and Kherson oblasts, where the agro-climatic conditions are usually difficult and risky, has a corresponding influence, which lead to a smaller number of samples with low quality indicators.

SGS experts note a general decrease in the content of protein and gluten. The average protein content was 11.80% (dry matter) against 12.58% in 2021. The average crude gluten content (dry matter) was 21.6% against 25.9% in the previous the season. Simplified cultivation technologies in conditions of shortage of basic resources, of course, had their impact on quality.

As for other quality indicators, the content of germinated grain was lower in 2022 compared to 2021 (0.29% vs. 0.88%) as well as the content of fusarium grain (0.04% vs. 0.17%). The content of incomplete grain also turned out to be significantly lower at 1.49% against 2.24% in 2021.

In the structure of the examined samples, 39.2% of wheat corresponded to 1-3 grade that traditionally attributes to food wheat. 39.5% of samples were of 4 grade and 21.3%  of non-standard wheat. Compared to the previous year, the share of food wheat decreased slightly (42.6% in 2021), but remained at the traditional level for Ukraine.

Research by SGS specialists of wheat samples from export batches also indicates that, in general, there are no significant problems with compliance of quality indicators with the requirements of importing countries.

Export

Speaking of export of Ukrainian wheat, since the beginning of full scale invasion of Russian troops to the territory of Ukraine the delivery of grain on the global markets nearly stopped by 4 months. By July export amounted to over 140 thsd tonnes, which is extremely low figure for Ukraine. From the beginning of new season the situation did not see major improvements and in August only when «grain initiative» started to work and three ports of Great Odesa were unblocked the export of wheat increased. However, for 4 months of «grain initiative» work the monthly deliveries of wheat from Ukraine did not reach last year's figures. The largest volumes of grain export were fixed in October - almost 2 mln tonnes. In November, due to higher risks of «grain initiative» failure export declined to 1.8 mln tonnes. In December worsening of weather conditions and power outages of infrastructure facilities were added to the negative factors affecting export volumes, including port infrastructure, due to missile attacks and damage to energy facilities of Ukraine.

It should be noted that due to limited volumes of grain shipment for export via main sea ports, the share of export batches delivered by land transport has significantly increased. In particular, in August 2022 when wheat export activity increased, nearly 9% of monthly volume of foreign deliveries was conducted by land transport, and 10% more - via railways through borders with the EU countries. In November the part of export batches of grain delivered by auto transport declined slightly - to 8%, but deliveries by railways increased to 13% of the total export. Thus, less than 80% of wheat was exported by sea, while in the pre-war period this figure was 98%-100%.

Diversification of transport supply of wheat export effected the geography of grain export. If in July-November of 2021/22 MY the EU countries were not one of the TOP-10 importing countries of Ukrainian wheat, then at the same period in 2022/23 MY, five EU countries entered the TOP-10 importers.

Turkey became he main importer of Ukrainian wheat for 5 months of the current season. However, in the previous season this country was one of TOP-3 main buyers, and in 2022/23 MY increased the import volumes by 12% year-on-year.

Romania became the 2nd largest importers of Ukrainian grain, although being the large exporter itself. But, according to Customs statistics, in the current season Romania imported nearly 1.2 mln tonnes from Ukraine. In this case we can say that the country became the transshipment hub, and about the possibility to further deliver Ukrainian wheat through the port of Constanta.

Spain occupies the 3d position among the largest importer of grain. According to the European Commission, in a previous two seasons Spain imported 478 and 382 thsd tonnes respectively. However, for 5 months of 2022/23 MY the volume of wheat imported from Ukraine by Spain reached 808 thsd tonnes. Thus, during the reporting period, only two countries imported Ukrainian wheat in volumes corresponding to the annual volume of imports of all bloc countries. At the same time, about 439 thsd tonnes were imported by Poland, 346 thsd tonnes by Italy, and 211 thsd tonnes by Hungary. Thus, Ukraine became the main supplier of wheat to the EU. However, these deliveries have been mainly forced and main volumes are to be re-exported. Moreover, EU is traditionally a competitor for Ukraine on the global market of wheat. But in a difficult times for Ukraine, good partnership relations allow us to work beyond typical competition.

Total wheat export for 5 months of the current season reached nearly 6.8 mln tonnes, which is 54% lower y-o-y and accounts for 49% of the forecasted export potential, which APK-Inform analysts assess at 14 mln tonnes (according to optimistic scenario of market development), i.e., if the pace of exports through the ports of «Great Odesa» is maintained.

Expectations

Speaking of future prospects, currently the basis for the 2023 wheat harvest has already been formed, as traditionally about 97% of wheat crops are winter varieties. The winter crops have already been planted for the upcoming harvest, and the planting areas turned out to be 57% smaller than those sown for the current season’s harvest, amounting to only 3.8 mln ha, which is the minimum figure for a multi-year period. This figure appeared to be even 20% lower than harvested wheat areas in 2022, excluding the four main regions. Weather conditions had a certain influence on the reduction of crops, in particular a sufficiently wet autumn with abundant precipitation in some regions. But military activity in Ukraine remain the major factor. Thus, taking into account the possible further decrease in grain yield, due to expensive production resources, and in conditions of significant security risks, we can expect a further reduction in wheat production in the next season.

According to operational data, the most significant reduction in the areas under wheat was recored in the Kharkiv region, where the area under the crop decreased by 70% y-o-y. In Sumy Oblast areas decreased by 39%, in Cherkassy Oblast - by 28%, in Mykolaiv Oblast - by 25%. The growth of areas was recorded in Zakarpatska Oblast (+33%) and Zhytomyr Oblast (+17%). Ivano-Frankivsk and Khmelnytska Oblasts both increased areas by 1%.

It is unlikely that it will be possible to compensate for the mentioned failure of winter wheat by planting spring crops. Because the production of spring wheat is not typical for Ukraine, and areas account for nearly 3% of the total areas under wheat. Moreover, spring varieties have lower yield and can be less attractive for farmers.  

In general, taking into account the considerable stocks (4.4 mln tonnes according to APK-Inform analysts), and possibly effective their sale primarily for export, the reduction of the wheat harvest will lead to the formation of a more tense, but not critical balance with the possibility of forming a significant export potential. As for the volumes of food wheat for the formation of domestic food security, it is likely that there will be sufficient grain volumes. But it will be possible to speak more precisely about this in the final stages of the wheat vegetation, when estimates of the distribution by quality appear. 

The significant remaining war risks can change the situation at any moment, adversely affecting every link of the value chain in the segment, starting with the physical inaccessibility of the fields and problems with the supply of resources, ending with the inability to finish and sell the harvested crops. But, taking into account the excess of initial expectation in both production and export of wheat in 2022, there is hope for a decent grain harvest in 2023 as well, and for Ukraine to maintain its status as a reliable supplier of food products to the global market.

By APK-Inform

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