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REPORT: Black Sea wheat exports. October 2016

The fight for new markets as productions hits a new record. Written by Andrei Agapi, edited by Jonathan Fox, S&P Global.

Wheat crop size

The Russian wheat crop forecast for the 2016-17 marketing year is 72 million mt, according to the US Department of Agriculture,  an increase of at least 4 million mt year on year.

However, as of October 10, 75.5 million mt of Russian wheat had already been harvested across 97.6% of the area, according to Russia’s Ministry of Agriculture.

So the USDA’s forecast has already been overtaken, and indicating the biggest wheat crop in Russian history, in a year when wheat production is expected to expand in most producing countries.

Russia has proved its determination to ramp up wheat production and exports during over recent years, earning the Black Sea region the proud title of the wheat basket of the world.

Wheat exports from the Black Sea region, including Ukraine, Romania and Bulgaria, are expected to grow by 13.5% to 51 million mt, with Russia amounting for 41.3% of those exports.

Indeed, last year Russian exports exceeded US wheat exports and this year it is set to become the world’s number one wheat exporter – outmatching the entire European Union.

France is the EU’s black sheep, with current-year production forecast at 29 million mt, down 28% year on year, due to heavy rains during a crucial stage of the crop development.

As a result, the EU’s export forecast is 26 million mt, in second place, while the US is third at 25.85 million mt. Russian exports are set to reach 30 million mt. 

Pace of wheat exports

In the 2016/17 marketing year Russian wheat exports have finally outpaced last year’s levels, at 9.14 million mt as of October 12, up 6.5% from same time last year.

Three months into the marketing year, traders had been expecting a more vigorous start.

However, a few factors interfered with those expectations.

Fundamentally demand was very slow to pick up as buyers, demotivated by constant falling prices, were continuously postponing decisions until the very last moment.

This discouraged forward export sales and hampered the visibility of exporters. 

The forecast for this year’s wheat export program stands at 30 million mt, up 22% year on year.





However, what’s more important is the share of exports in the first three months of the marketing year.

This year we saw only 27% exported, from 31% last year.

Farmers' selling habits

Probably the biggest factor in sluggish Russian wheat export sales was the unexpected behavior of Russian farmers in the new marketing year.

Exporters had been expecting a replay of the previous year’s scenarios where farmers sold their wheat crops directly from the fields, due to a lack of storage and the expected bumper crop.

However, as Russia has ramped up wheat production, at the same time favorable weather and improved planting techniques have allowed for improved quality, which in turn meant higher profits for farmers.

Considering falling fuel and fertilizers costs, they had the opportunity to reinvest these profits into storage space, allowing them to store wheat after harvesting it, instead of having to sell it to exporters straight away. 

Intervention fund

Storage capacity was critical in the first few months of the harvest as the intervention campaign only began on September 19, a month later than last year.

The aim was both to replenish strategic wheat reserves and support the farmers.

This support took the form of a floor price at which they could sell their wheat on a CPT basis at authorized silos.

The floor price was set at around Rb10,400/mt for fourth-class wheat, typically the most exported quality of 12.5% protein wheat.

The same wheat translates into a replacement cost of $179.50/mt, or $4 to $5 above international prices FOB Novorossiisk.

This year’s buying has reached 385,965 mt as of October 12, or seven times more year on year.

So if the export problem was caused by the intervention fund, when will the buying stop?

In previous years, the campaign lasted the entire marketing year – up to June 30 in 2015 and April 6 in 2016.
 
Last year’s campaign proved particularly successful because the purchase price set by the government was the same as the current level at Rb10,400/mt on October 5, 2015, but when the ruble was much stronger against the dollar. 

Last year’s intervention purchases reached 1.644 million mt, 68.9% more than the previous year as the government made efforts to replenish its strategic reserves.







International seaborne market

Lagging demand and expected oversupply have hit markets across the world equally.

The USDA’s total wheat production forecast for the 2016-17 marketing year is 744.44 million mt, up almost 10 million mt over the last marketing year.

Russian 12.5% protein wheat, FOB Novorossiisk, has gradually fallen in price since May, when it stood at $193/mt.

It lost $31/mt in July alone. Australian Premium White wheat, FOB Kwinana, also lost $31.50 in the same period from $229/mt to $197.50/mt.


Quality issues

The same rains that have enabled Russia to achieve a bumper crop this year have diluted the protein content of its harvest.

As a result, Russia is on the market right now with feed wheat that is of lower quality than Ukrainian wheat due to sprouted seed content.




Therefore Russian feed wheat is selling at a discount to Ukrainian wheat.

On the higher grades, 11.5% protein is closer to Ukrainian wheat.

However, prices for Ukrainian origin are still maintaining a premium due to demand from Far East countries.

On 12.5% protein, the usual Russian quality, the premiums switch round and are maintained at around $2/mt over the Ukrainian wheat.

Furthermore, traders believe that as the farmers usually store their best quality wheat at the beginning of the year, some higher protein and W content wheat will surface in the second half of the marketing year.

As a result, spreads between Ukrainian and Russian wheat are expected to return to normal.


Ending stocks

A major concern for the 2016-17 marketing year are ending stocks, because of uncertainty over the export program.

With 8.25 million mt of wheat exported in the first quarter of the marketing year, Russia still has to push out 21.75 million mt over the rest of the year, averaging almost 2.5 million mt/month.

This is a rather bold target due to the difficultly of exporting from the Black Sea in the winter months, with storms affecting loadings and the closure of transshipment in the open waters of Kavkaz port.

Last year’s exports in the second part of the marketing year were 38% slower than the first six months.

USDA puts Russia’s ending stocks at 9.6 million mt this year, a 4 million mt increase over the last year – and rightly so.

However, this may not be the last time they have raised this forecast.


Competition

Lower wheat prices and freight rates made buying regions reconsider their habits.

Southeast Asian markets have shifted their attention to the most competitive wheat on the market – Black Sea wheat.

Ukrainian wheat was winning almost all private tenders for shipment between August and November, sidelining Australian wheat.

However, Australian wheat stages a return in December-January, with a record crop of their own.

The USDA puts it at 28.3 million mt, almost 3 million mt higher than last year, due to an abundance of rain in growing areas.

Argentina’s harvest is also forecast to increase by at least 3 million mt to 14.4 million mt.

Both Argentine and Australian wheat is bought by Southeast Asian mills and processors from December onwards, which will toughen the competitive landscape for Black Sea wheat.

It is not all doom and gloom for the Black Sea wheat in 2017; Egypt and other North African countries are still relying on that region to source their wheat, especially after the disappointing French harvest.


Content produced by S&P Global Platts, October 2016


This content is provided by Global Grain Events for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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