Ukraine's role on the wheat market - changes in TOP-global exporters

APK-Inform

 

Record world wheat production in 2016/17 MY significantly increased competition at the foreign markets and moved Ukraine from the 5th to the 6th place in the ranking of world exporters. At first glance, predictions of global experts of lower wheat crop in 2017 should have facilitated work of Ukrainian traders in the current season, however, the start of 2017/18 MY showed, it's not so simple.

 

Ukraine’s positions on the global scene

We should say that, neither in 2016 nor in 2017 Ukrainian farmers were not able to break the record of 2015 on wheat production. Over the past two seasons, Ukraine was observing a gradual decline in grain production and, accordingly, export volumes. In 2016/17 MY gross wheat crop amounted to 26 mln tonnes with an export volume at 17.5 mln tonnes, while according to preliminary estimates of analysts of APK-Inform Agency, these figures in 2017/18 MY are estimated at 25.9 mln tonnes and 14.7 mln tonnes, respectively.

An additional complexity was caused by weather anomalies in Ukraine in April-May of this year, and unfavorable weather conditions during grain maturing. As a result, wheat quality issue in 2017 remained open for a long time, which really complicated traders’ work with forward contracts. In addition, due to the late start and backlog of the harvesting campaign in Ukraine, the number of wheat offers was often insufficient at the start of 2017/18 MY.

At the same time, the situation in Ukraine is not critical if to compare with the problems, which other wheat exporting countries faced. Many of them set antirecords, which will help to reduce competition on the world scene and can support prices. In particular, wheat harvest in Canada may be minimal over the past 6 years due to poor crop conditions. Currently, there are problems with the volume and quality of the harvest in the EU countries. So, the heavy rainfall in July challenged the quality of the new wheat crop in Germany. As a result, the share of feed grain could grow from 20% to 40% and dent the export. The decline in gross wheat harvest is also typical for the USA: for example, the yield of spring wheat in North Dakota (one of the main producing states) is down 23% from the average multi-year values.

It is worth noting decrease of predictions of wheat production in South America. Thus, due to frosts, part of the crops suffered in Brazil. At the same time, wheat harvest in Paraguay in 2017/18 MY could decrease by about 30%. The final stage of wheat sowing in Argentina takes place in difficult conditions and with a delay in rates due to excessive rainfall.  As a result of unfavorable weather conditions, the areas under this crop decreased by 150 thsd ha, but still 5% higher than last year's figure.

Wheat harvest estimations continue declining in Australia and may become minimal over the past 9 years.

However, competition on world markets will remain high this season, and the main reason for this will be the record wheat production in Russia. Besides, its quality significantly exceeds all expectations, and the share of milling grain in the gross harvest, according to experts, is more than 70%. It is also not a benefit for Ukrainian exporters that Bulgaria, which is in the list of participants of the Egyptian agency GASC tenders. According to preliminary estimates, this season sets an absolute historical record for wheat production and plans to increase export volumes.

On the other hand, last year's record wheat crop in the world provided large carry-over stocks, which helped the main exporting countries to significantly increase their export potential.

At present, despite the fact that the beginning wheat stocks in Ukraine are almost 2 times less from 2016/17 MY (2.1 mln tonnes in 2017/18 MY versus 4.1 mln tonnes in the past season), Ukraine holds the 6th place in the ranking of world exporters. However, the season has just begun, so the situation may still change.

 

Rating of the global exporters of wheat

Position

2015/16 MY

2016/17 MY

2017/18 MY*

country

mln tonnes

country

mln tonnes

country

mln tonnes

1

EU

34,7

USA

28,7

Russia

31,5

2

Russia

25,5

Russia

27,8

EU

29,5

3

Canada

22,1

EU

27

USA

26

4

USA

21,1

Australia

24

Canada

20,5

5

Ukraine

17,4

Canada

20

Australia

19

6

Australia

16,1

Ukraine

18

Ukraine

16

* in accordance with the August adjustments

Source: USDA

 

Volumes and geography of export supplies

India played a key role in the export market in the 2016/17 MY. For the first time in the last 10 years India showed an active interest in Ukrainian wheat, importing almost 3 mln tonnes. In the season-2015/16 Ukraine exported only 52 thsd tonnes of wheat there. India became a leader instead of Egypt with the volume of purchases of 2.5 mln tonnes of wheat of Ukrainian origin.

Also, worth noting increase of export of Ukrainian grain to Bangladesh (from 1.4 mln tonnes in 2015/16 MY to 1.7 mln tonnes in 2016/17 MY), Morocco (from 553 thsd tonnes to 983 thsd tonnes, respectively) and Tunisia (from 567 thsd tonnes to 654 thsd tonnes, respectively).

All this made it possible to compensate for the decline in exports to Italy (from 631 thsd tonnes in 2015/16 MY to 406 thsd tonnes in 2016/17 MY) and Israel (from 591 thsd tonnes to 488 thsd tonnes, respectively).

We note that at the start of 2017/18 MY the rates of export of Ukrainian wheat have remained rather high, and the key destinations for shipping are such countries as Thailand, Egypt and Indonesia, which totally imported almost 3.5 million  tonnes.

 

 

 

 

Price situation

Regarding development of the price situation on the Ukrainian wheat market in 2016/17 MY, it can be said that it was more characterized as low volatile and only occasionally subjected to minor adjustments. At the same time since April this year the bearish price trend was mainly recorded, conditioned by the pressure of the world market conjuncture.

It should be noted high purchasing activity of traders. But at the same time they needed urgent large-tonnage lots of wheat to cover positions on previously concluded contracts against a gradual reduction of carry-over stocks and insufficient supply of new grain crop. All this restrained further seasonal price cuts and at the start of 2017/18 MY this sector observed a bullish price trend.

So, if at the end of June demand / supply prices of milling wheat (12.5% protein) and feed wheat on FOB basis were within 177-184 / 180-188 and 163-171 / 166-174 USD/t with delivery in July, then for the first two weeks of the season-2017/18 prices rose to 183-187 / 185-193 and 163-171 / 166-174 USD/t FOB, respectively, which significantly exceeds the similar figures of the past MY.

However, at the end of July, an increase in the forecasts of wheat production in the main exporting countries caused a bearish trend (a gradual reduction in prices), which now vary in the range 180-184 / 182-186 and 157-165 / 160-165 USD/t FOB, respectively for wheat with protein at 12.5% and feed wheat.

 

 

Price situation on CPT-port repeated the dynamics of prices on FOB basis. Except for the start, almost all 2016/17 MY observed a bullish trend in the wheat sector, which was replaced by a decline only in April following the external markets. The most significant decline in prices was observed in June 2017. In general, from April to July the demand prices for wheat fell by an average of 150-400 UAH/t - up to 4750-5150 and 4300-4850 UAH/t CPT-port. Purchasing prices in USD also significantly decreased and were often fixed in the range of 159-167 and 148-156 USD/t on the same terms.

At the same time, in mid-July, the sector resumed a price increase, caused by the need for traders to attract large-tonnage lots of new wheat to cover positions by previously concluded contracts. The situation was most typical for the milling wheat segment. The number of large-capacity lots was estimated as insufficient, and grain of the new crop was almost fully exported due to higher prices.

So, by the end of July, purchasing prices increased significantly and were in the ranges of 5000-5350 and 4630-5000 UAH/t CPT-port and 169-175 and 153-158 USD/t CPT-port.

However, by closing the contracts, many traders considered it advisable to gradually reduce the demand prices, which are currently fixed at 4650-5050 and 4250-4600 UAH/t CPT port and 159-168 and 144-148 USD/t on the same terms respectively for grain of 2nd grade and feed wheat. Additional pressure on prices during this period was provided by the conjuncture of the world market.

 

Expectations and predictions

Concerning the short-term forecasts, most market operators agree that the trend of a gradual decline in prices will continue due to the world market conjuncture, in particular, the increase of wheat production forecasts of in Ukraine, Russia and Kazakhstan. At the same time, the situation on the feed corn market will make its own corrections.

In the middle of autumn, it is possible that the bearish trend will change to a bullish one, which will be caused by the growing competition between export-oriented and processing companies in the domestic market. Also (as mentioned above), the prospects of lower wheat harvest in the main producing regions of the Southern Hemisphere can support prices.

Anna Tanskaya, APK-Inform Agency

 

Commented by Andrey Kupchenko, analyst of APK-Inform Agency

The main pressure on the wheat market this season will be made by its great harvest in Russia, which will become the leader in the supply of grain to the global market and which supplies wheat mainly to the same markets as Ukraine. But here it is worth noting that the realization of the export potential of the Russian market will largely depend on the nature of trade relations with Turkey, traditionally the second largest importer of wheat from the Russian Federation. In addition, taking into account a record harvest, the issue of providing infrastructure facilities (granaries and terminals) remains open, which may affect the quality of grain.

We can also hope that Russian farmers will restrain wheat sales, which will support prices. In this context, it should be noted that European farmers are ready to adopt a similar policy. And don’t forget speculators on global trading floors, which together gives the hope of keeping a relatively stable price level.