There are always substantial changes that influence the global trade, such as currency regulation, counties relations, and work of the WTO.
How will the break of the Pacific Agreement by Donald Trump influence the world? How will be the market affected by the trade war between China and the US? What are the negotiations, and what to expect? And what is most important, what will be the consequences?
These are only a small part of the factors that grain traders are looking at. The reason is the grain trading that has become the exchange sales long ago. This means that the macroeconomics and the agripolitics have more weight on it and there is a necessity to understand the possible consequences.
The best experts and the experienced traders shared with APK-Inform Agency their estimations of the current global situation, and the opinions over the main trends of the grain market in 2017/18 MY, and possible risks in 2018/19 MY.
Macroeconomics and the argipolitics
Oleg Ustenko, Executive Director of The Bleyzer Foundation, over the key factors of the global trade and economy that influence the Ukrainian exports market of grains:
“The current situation in the world affects not only the trade of agriproducts, but every sector of economy. We live in the conditions that are called ‘new normality’ – things that have been absolutely not normal earlier now became normal. For example, the break out of the Pacific Agreement, the building of wall between the US and Mexico and so on… All of these influence the economic development of the countries and people’s lives.
The countries with small and open economies, such as Ukraine (the GDP is nearly $100 bln in 2018), do not affect sufficiently the global conjuncture. However, if we consider separate areas especially agricultural, Ukraine is a serious player on the global scene and can significantly affect the global trade”.
The expert pointed out, that the currency devaluation (for example, in Turkey or Argentina), some uncertainties in Latin America and Central Europe and the growth of the economics in several countries can be the main factors that increase the uncertainty of the macroeconomics since the start of 2018.
Moreover, O.Ustenko said that the macro-economical uncertainties are added to the price structure. The economics of Ukraine depends on the export market of agriproducts. But on the other hand, it faces the trade deficit. In particular, there is a high rate of devaluation that press on the national currency. Thus, in the middle term there are a lot of risks for the country. First of all, it is the high costs of the foreign debt service (approximately 5% of the GDP with it’s growth prospects at 3% at the best).
The expert believes that the factor of uncertainty stimulates the Ukrainian agriproducers to be more active players on the global market and to be focused on the expansion of their activities at the expense of the internal markets. Also, he added that the market of crude oil impacts the agriproducts price formation and it can even lead to the price increase in the short term perspective.
“Of course it is very difficult to make any forecasts and to work in such conditions. But we live in the world of competition”.
New technologies and possibilities
Many creditworthy countries try to evaluate the currency within the GDP, trade balances etc. In the modern world as well as in the grain trade area we can see that the new possibilities and ways of estimation appeared – the cryptocurrency, and thus the new ways to control it – the technology of blockchain.
Andrey Grigorov, Co-founder and CEO at ceREALIA, told us about the features and the prospects of this technology use.
Speaking about the prospects of the grain season-2018/19, the expert pointed out that the cryptocurrency and the blochain technology would not make significant changes despite their rapid development. Herewith, the extremely low level of currencies in Turkey and Iran is a risk for graintraders in Ukraine and Russia. The expert believes that the increase of the interest rated of American bonds leads to these buyers’ solvency possibility and thus they might need to shift away from the dollar. “The cryptocurrency is an alternative for dollar. As for today, there are stablecoins that are artificially supported by the dollar and gold in some way, thus they are less volatile. I believe the cryptocurrency is the only one solution for Iran (both the private sector and the governmental companies)! The US imposed sanctions on the president of Iraq Central Bank, which means that the money paid for the import of Ukrainian commodities could be blocked inside the US financial system”, explained the expert.
Moreover, A.Grigorov pointed out that the trade financing by means of cryptocurrency is an untapped source and the further deterioration of the trade financing conditions in many countries can contribute the shift to this type of currency – “in Ukraine the deterioration reaches 23-24%. Whereas, the huge volumes of the cryptocurrency are not used. Of course, it is difficult to convert the cryptocurrency, but it is a matter of time. We already work with the large exchanges to attract the necessary volumes of the cryptocurrency to the grains market. I believe that the financing on the basis of goods or 7-8% of the net annual income would be interesting for every market participant”, he added.
The main risks of the grain trade in 2018/19 MY might be the escalation of the conflict between Iraq and Israel that can reduce the volume of the exported commodities to that destinations. It can also negatively affect the volumes of exported items from Ukraine and Russia to Egypt. Herewith, the expert does not exclude the possibility that the export of goods can be increased to Turkey, which is a global wheat flour production leader. However, the country should strengthen the national currency rate, but the chances are low.
Moreover, wheat and corn produced in Black Sea region became the matter of interest for the hedge funds – “since lately the CME Group started to trade these grains. From the time they enter the exchange market and increase the prices on the grain market, they will influence the prices on the physical market”, A.Grigorov added.
Realities of the Ukrainian grain market
The market of the cryptocurrency and the exchange trading is a future Ukraine is opting for as an integral part of the global trade. The most short-term prospects and the realities of the grain market in Ukraine were expressed by Vladimir Osadchuk, General Manager at COFCO Agri Resources Ukraine.
Ukraine being a part of the global trade depends on both the inner political factors and the global ones. First of all, the expert points out the geopolitical factors, such as the trade war between China and the US. Despite some positive moves of the conflict the expert believes that China will redistribute its forces and purchase volumes among different countries. “The Black Sea region and the EU are one of those markets that signed the contract with China that is going to increase the purchase of the commodities”.
Moreover, there are many regional factors in the world (Syria, Venezuela, Easter Ukraine) that also bring changes to the market operations. “In particular, Ukraine and Russia are the countries that supply most of the world with the agriproducts. The market is also affected by the game of sanctions”.
Herewith, the main factor that affects both the market and the exchanges is weather. “The exchange markets reversed the price trend after the forecasts of lower wheat and corn production in Argentina and Brazil. Thus, all of the buyers reoriented to the Black Sea grain”.
The expert also added that the prospects of grain production in Ukraine are not that smooth due to the weather conditions that might influence the yield of the crops.
There is another factor that needs extra attention – the traditional balance of production and export. Today Ukraine works in terms of fierce competition. “If we speak about barley Ukraine competes with Europe and Australia, in terms of wheat – with Russia, the EU, America and Australia, in terms of corn – with South and North America and sometimes with Europe (mostly oriented to import). And today the South Africa became a competitor in terms of trading to Asia”.
V.Ostapchuk believes that the grain market is going to develop in an up-trend within global trade balances. And the demand will be oriented mostly onto the Black Sea wheat that is $20 cheaper in terms of freight and destination. The main distribution channel for Ukrainian corn in 2018/19 MY is going to be Europe and in October-November China will increase its demand on the remaining quota. Ukraine needs to preserve its competitiveness on the global market.
There is one more factor that influences the price situation on the Ukrainian market – the internal political factor, as the sometimes the adopted laws are not feasible in the current conditions.
The main problems are the hryvnia devaluation, the necessity to implement the equal right for every grain market participant, and severe logistical problems.
“Today Ukraine has many problems that need to be resolved. But I believe that the new season is going to be successful and profitable”, concluded V.Ostapchuk.
Corn market prospects
Timur Shishlov, Trader in RisOil Ukraine, told us about the prospective crop such as corn and the main factors that influence its price formation. First of all, the expert pointed out the US unpredictable policy that was a reason of substantial price changes on the market.
T.Shishlov believes that the main factor that affects the price dynamics is weather. According to his estimation the weather is favorable for corn in Northern Hemisphere that produces approximately 85% of wheat, 70% of corn and 60% of soybeans.
Moreover, he pointed out that by the preliminary estimation of the USDA in 2018/19 MY the corn production will increase. The corn consumption is the future season will hit a record – 1.09 bln tonnes whereas the ending stocks could be the lowest for 6 recent years. Also, the expert added that the regions that traditionally import Ukrainian corn (Egypt, China and Iran) are going to increase the flows of grain in 2018/19 MY.
Apart from the balances, the traders also monitor the stock to use ratio that is the lowest for 6 recent seasons. “Many experts suppose that this rate should be evaluated excluding China that has the largest ending stocks of corn and this does not influence the market. Thus, this rate is much lower and the current forecast for 2018/19 MY is the same as it was in 2012/13 MY when the prices varied at the level of 200-300 USD/t FOB”, the expert added.
Speaking about the corn balance in Ukraine the trader said that according to the USDA estimations the ending stocks will be rather low herewith the decline of the export and demand on Ukrainian corn proves the opposite. Moreover, The Middle East North Africa and China might increase the consumption of the feed corn which is a good sign for Ukraine.
“The new season can be advantageous for Ukrainian farmers and the market might go out from the low prices trend that lasted for 3 years. Certainly, the new season for corn will start later but this outcome is highly possible”, said T. Shishlov.
Key factors and forecasts
Olena Neroba, Head of the analytical department at Marcoрolo Commodities SA, believes that Ukraine has a problem of using the cryptocurrency. “Unfortunately, today many farmers offer the payment by “cryptocurrency payment form 2”. This topic is definitely highly interesting but the realities of the business organization in Black Sea region do not afford to use the whole range of its advantages. Herewith, we as the traders do our best to make maximum use of the modern technologies opportunities”, she added.
If we speak about the profitability of the US Treasury bonds for 3 recent years, it totals 1.90%, and for the first time since the crisis during 2007-2008 years exceeded the dividend yields of S&D. The expert believes that this might be a signal of the TINA time (There Is No Alternative) to be over. “Another economic trend is ending and 2019 may come into crisis”.
“Everyone knows that the price comprises on the basis of the supply and demand balance that is why everyone keeps looking at the balances, the ending stocks and stock to use ratio. But unfortunately, in the modern world these are offset by the political factors (e.g Trump twitter)”, the expert believes. Also, she is skeptical of the USDA reports that often do not match up with the local agencies production and stocks estimations.
The expert called on the market participants to consider mostly weather and main buyers instead of reports and do not expect the barley prices to hike as it was in 2017/18 MY.
Also, O.Neroba shared her expectation of the new season start.
“The macro-economical conditions are not optimistic. Trump threats to boycott Iran, the reduction of crude oil stocks and the decrease of it output push the prices up. Moreover, the correlation between the oil and the other commodities is high. Also, the trade war between China and the US is not over yet.
It is supposed that food wheat is going to have high demand rate, the feed grains and corn are neutral and soybeans are trapped inside the trade conflict”.
To sum up it should be stated that Adam Smith economic theory based on the S&D balance unfortunately or fortunately does not work anymore in the modern world. Moreover, we live in the age of information when Twitter runs the exchange. Today, we receive a wealth of information easily but now it is difficult to choose it and filter in terms of importance and credibility.
The compelling logistical problems in Ukraine need to be resolved as soon as possibly however, this is not going to happen quickly. 2018/19 MY for grains will meet the market participants with the old problems.
In the current conditions, the low price of Ukrainian grain is an only advantage. Together with these Ukrainian agrarians preserve the production cost-effectiveness in some degree. Yet, the question remains whether we will be able to save the cost-effectives in terms of grain production in Ukraine growing to 100 mln tonnes and to what extent we will be able to operate effectively such volumes of exports…
Prepared by Anna Tanskaya, APK-Inform Agency
Based on the panel discussion “Grain trade – 2018: key trends” as part of the XVII international conference “Grain & Maritime Days in Odessa” (Odessa)