2017/18 MY brought both positive and negative developments and trends to Ukrainian agrarians and other participants of the grain market. Despite the severe competition in foreign trade from Russia and the high level of the market uncertainty due to the trade conflicts between the USA and the EU, as well as the USA and China, last season Ukrainian grains managed to find new sales markets and covered all requirements of the traditional partners. The reduced domestic demand stimulated the export segment, and the inflow of investments in development of the export infrastructure allowed increasing the competition rates between port operators, which brought pressure on the transshipment tariffs in the ports. The current article focuses on the main trends of the ended season, and expectations for the new season.
Production and distribution
For 5 recent seasons, the annual production volumes of grains in Ukraine vary at the level of 60 mln tonnes. In 2016, Ukraine broke a record, when agrarians harvested 66.1 mln tonnes of grains and pulses with the average yield at 4.61 t/ha. Last season, Ukraine decreased grain production by 6% compared with the record figures, due to rather adverse agro-climatic conditions.
At the same time, Russia managed to significantly increase grain production (up 12%), and formed a record export potential, which significantly increased the competition rates on the global market. Of course, the reporting situation had some influence on the Ukrainian market of grains.
In the structure of grain production in Ukraine, wheat started restoring its dominant position, which in 2017/18 MY reached 42%, against 39% in the previous season. At the same time, the share of corn fell from 42% to 40%, and barley — from 14% to 13%. Reduction of barley production in Ukraine is another trend, which continued in the ended season and will continue developing in 2018/19 MY. In 2017/18 MY, the production volumes decreased by 12% in comparison with the previous season. The similar trend (down 12%) is forecasted for the current season.
Also, we need to mark the restoration of the share of alternate crops in the harvest structure of 2017, which totaled 5%, against 4% in the previous year.
For 3 recent seasons, the share of exports in the supply and demand balances of grains totaled nearly 60%. At the same time, in 2016/17 MY Ukraine broke a record in the exports — 45 mln tonnes. Despite some decreasing in grain production, last season the exports remained fairly active, and covered 60% of the general distribution, or 40.4 mln tonnes in absolute terms. As a result, the ending stocks will reach 4.5 mln tonnes, which is the minimum figures since 2009/10 MY.
Reduction of the domestic consumption of grains remained the key trend in terms of the constantly declining population and livestock animals. In the future, Ukraine will be able to change the negative trend only through the exports of finished products — both grain by-products and meat products.
The analysis of the dynamics of grain exports from Ukraine shows that the segment of wheat, which reached the same harvest volumes, as in 2016/17 MY, decreased the exports by 2%, to 17.2 mln tonnes, which became the second largest figures in the whole contemporary history. Taking into account the fact that Ukraine supplies wheat on the same markets as the Russian grain, the reporting decline of supplies is very insignificant.
In the segment of barley, the exports reduced in more significant way, down almost 20% compared with the previous season. If the export segment of wheat mainly worked out new alternative markets, then the supply of barley was more consolidated, and the competition with the Russian grain became much more difficult.
Last season, Indonesia became the key importer of Ukrainian wheat, and purchased almost 2.3 mln tonnes of the grain, up 42% compared with the previous MY. At the same time, Egypt reduced the imports by 22%, which compensated the reporting growth of supplies in the case of Indonesia, and Egypt mainly purchased Russian wheat.
Also, in 2017/18 MY Tunisia increased the supplies by 53%, and the Philippines — up 59%. In addition, Spain increased the imports of Ukrainian wheat in 2.7 times, due to reduction of the domestic grain production. In 2017/18 MY, the general shipments of the Ukrainian grain to the EU increased by 48%, and reached 1.6 mln tonnes.
In the export segment of Ukrainian barley, Ukraine lost its positions on the market of Saudi Arabia, and supplied 1.8 mln tonnes of the grain to the country, against 2.3 mln tons tonnes in the previous season (down 20%). At the same time, Ukraine increased barley exports to China — 792 thsd tonnes, up 2.6 times compared with the previous MY.
Also, in the current season Ukraine increased barley supplies to Turkey (up 26%) and Spain (up 23%).
In terms of the severe competition, Ukraine managed to export significant volumes of grain crops and diversify the sales markets. At the same time, there are still many undeveloped destinations for wheat and barley exports. It is necessary to ensure the required qualitative parameters of grains and form the competitive prices to reach new sales markets.
In 2016-2017 period, Ukraine commissioned new grain terminals with the combined transhipment capacity of more than 10 mln tonnes per year. Thus, the general transshipment capacities of port terminals in Ukraine is estimated at more than 60 mln tonnes per year. In terms of the current annual grain transshipment volume within 40-45 mln tonnes, it forms a high competition between port operators which stimulates the following reduction of tariffs for cargo processing. The situation became one of the most important trends in the reporting season. Also, it contributed to formation of relatively high domestic prices in terms of lowering of the prices on the global market.
While analyzing the transshipment of grain cargoes in the seaports of Ukraine, it should be noted that despite the growth of capacities, the country did not significantly increase the export shipments of grains yet. According to the Ukrainian Sea Ports Authority (USPA), in 2017 the ports shipped 39.5 mln tonnes of grain cargoes, up 1% only compared with 2016 (39.3 mln tonnes).
As for the prospects, in 2018 Ukraine will increase the annual transshipment capacities in the ports by another 14 mln tonnes. Thus, in the following years there will be no problems with grain cargoes transshipment in the ports. At the same time, the delivery of grain export batches to the ports still remained the major bottleneck of the supply chain.
In terms of absence of any significant positive developments in the railway segment, which provides transportation of grain cargoes, cargo loading on the railway shipment is constantly increasing. According to the Ukrainian Railway (JSC Ukrzaliznytsia), in 2017 according to the Ukrainian railways transported 34.3 mln tonnes of grains, up 12% compared with 2016 (30.7 mln tonnes).
Last season, the domestic consumption of grain crops also demonstrated some volatile trends. In the market segment of wheat, in the beginning of the season there were some expectations for increasing of flour production in terms of active exports of the finished products. But by the end of the season, it became clear that in 2017/18 MY the production volumes of flour will become lower than in the previous season. According to our estimations, large-scale flour mills reduced the production figures by more than 3% compared with the previous year. The decline in the exports of Ukrainian flour for 3 recent months of the season became the main reason for such situation development.
Feed grain is the most large-capacity segment of the domestic consumption of grains in Ukraine. But mixed feed production also faced some multiple-valued situation. For 5 recent seasons, the annual production volumes of animal feed in Ukraine totaled over 6 mln tonnes, but they have some fluctuating features, due to the instability of the livestock of animals and poultry. Also, the share of grain components in the production of animal feed continued gradually decreasing.
According to APK-Inform estimations, in 2017/18 MY the feed consumption of grains totaled nearly 13 mln tonnes, down 7% compared with the season-2016/17. In 2018/19 MY, the figures will decrease by another 3%, and total nearly 12.6 mln tonnes. Generally, APK-Inform forecasted that in the new season the domestic consumption of grains and pulses will total 21.7 mln tonnes, down 2% compared with last MY.
In 2017/18 MY, the Ukrainian export and domestic markets of wheat and barley faced an upwards price trend. The situation developed due to the high competition between processing and export-oriented companies and decreasing of the crops production in Ukraine in 2017. At the same time, high competition rates on the global market made its adjustments in the price formation trends.
So, the upward price trend already started developing in the beginning of the season-2017/18, when the offer prices for milling (with 12.5% protein) and feed wheat increased by nearly 7-14 USD/t, and varied within 189-197 USD/t and 172-177 USD/t FOB, respectively. In turn, the offer prices for feed barley increased from 153-157 USD/t to 172-180 USD/t FOB. The growth trend appeared in terms of increasing of quotations on the stock markets and fears over the quality of new crop grains in the major countries-producers.
Also, the first batches of barley of the harvest-2017 often had low natural weight figures, and many traders proposed good premium, while looked for barley with the required natural weight figures, which made its important role in formation of the upward price trend. The reporting factors increased the purchasing prices of grain processors.
In addition, slowing down of grain sales by agrarians somewhat supported the prices, because they preferred to sell low-scale grain batches, and planned to sell their grain stocks later at somewhat higher prices. Also, the situation on the adjacent markets of feed barley and corn provided additional support to the prices for Ukrainian wheat, as well as the growth of prices by the key country-competitor — Russia, which mainly developed due to a series of Egyptian tenders.
Reduction of the global production of feed barley, due to the EU and Australia in terms of high production of milling wheat in the world, resulted in a significant reduction of the spread between the reporting crops.
Therefore, in the beginning of 2018/19 MY the offer prices for milling wheat with 12.5% protein content and feed wheat remained high, and in most cases varied within 195-200 USD/t and 184-189 USD/t FOB, up 15-20 USD/t compared with figures in the beginning of last season. At the same time, the offer prices of barley varied within the range of 192-196 USD/t FOB, up nearly 40 USD/t compared with the starting prices in 2017/18 MY.
Further prospects: factors, trends, expectations
As for the prospects of development of the market situation in the new season, we can specify several key factors. First and foremost, it is important to note the growth of unit labour costs for the production of crops in Ukraine, which totaled 15-20% compared with the previous season, due to increasing of the cost of basic resources, increased salary budget, as well as the expected decline of crop yield figures. Reduction of the competition rates from Russia is another positive factor, because in the new season they will have some decreasing in grains and pulses production, and consequently, exports. At the same time, Ukraine will also decrease its export potential by 6%, to 38.1 mln tonnes.
Andrei Kupchenko, grain analyst at APK-Inform Agency