Sizov, Managing Director of SovEcon: “If you look at the global grain market as a whole, I think farmers are receiving more bargaining power. Farmers have become better sellers which implies that it is harder for traditional traders to make money in this market. Now it is much more easy to access information. It is much more easy to hedge your risks and much cheaper to hedge your risks. Farmers also can store their grains more cheaply and easily. And that means that margins for traders are going down. I think the guys which will suffer most will be very large traders like famous ABCD’s of the global grain trading”
There have been major changes in the world grain markets over the last 10 years. There is a ‘Black Sea effect’ in the grain markets now. In the past season 2017/18, Russia, Ukraine, and Kazakhstan accounted for 37% of the wheat trade. Russia is breaking records in wheat production. It has increased agricultural production and food exports 16 times since 2000. It has tripled wheat exports in the last three years. So grain acreage and harvest in the Black Sea region have great importance for global grain trading.
For this special issue, we interviewed with a high-profile expert who is being closely followed by grain industry; Mr. Andrey Sizov. Mr. Sizov is managing director of SovEcon since 1998, a leading Russian company specializing in agriculture markets research and consulting. He is one of the most quoted experts about Black Sea grain markets in the international media like Wall Street Journal, Financial Times, Bloomberg and Reuters. He is also the most sought-after agricultural expert for international conferences.
We asked him questions on recent developments and challenges in the grain industry, risk factors for the wheat market and the prospect for Russian grain exports.
Here are Mr. Sizov’s guiding comments:
You have been following the grain markets for more than two decades. What kind of changes you have been experiencing on global grain trade? Could you share your observations with us?
So, yes. I will mainly speak about the Black Sea. The Black Sea has become a huge supplier of grains, become a huge and fastest growing exporting hub for grains with mainly wheat and of course to a lesser extent corn. I think potentially the corn could be a larger crop for this region in the medium and long term, especially when it will accept genetically modified crop because so far it is officially not allowed to grow genetically modified crops in Russia and even in Ukraine. So, the Black Sea became an important and huge trading hub and fastest growing and exporting hub for wheat and to a lesser extent corn.
If you look at the world as a whole, I think the important change is that the whole trade is changing and farmers are receiving more bargaining power. Farmers have become better sellers which implies that it is harder for traditional traders to make money in this market. Now it is much more easy to access information. It is much more easy to hedge your risks and much cheaper to hedge your risks. Farmers also can store their grains more cheaply and easily due to the expansion of their on-farm storage, sheds, and bags. And that means that margins for traders are going down.
Also we should take into account that if you compare for example farmers’ business with traders’ business, -although obviously they are very different-, but there is one important point in my view that when prices are low, when margins are low as what we have been seeing since in 2011, everyone is suffering, both traders and farmers. However, at the end of the day farmers are being supported by the local government and traders are not. And I think farmers are becoming better traders so leaving a small margin for traders.
People are saying that soon there will be no business for traders because they are not providing value. I can’t agree. I think that the traders will stand in the market as they still do a lot of origination, hedging, financing, trade…They are still important in many cases as they want to buy large loads of grain. For one farmer it is impossible to handle 50 thousand or half million tons of grain in many cases. So traders will remain in this market.
I think the guys which will suffer most will be very large traders like famous ABCD’s of the global grain trading. There are very lots of internal restrictions like legal for example, a lot of bureaucracy and internal political games in those companies. And at the same time the service and value they are providing, medium size companies can do the same now. These medium-sized companies can hedge, they can arrange the trade. It is not so important to be that big as it is used to be 10-20 years ago. That’s why I think those largest companies probably will have the biggest issues.
It was a very good and relevant example that in last year several key grain traders left Louis Dreyfus, to set up a new company Sirientz which is likely to be much more agile and obviously not that big. And the company is focused on trading the Black Sea grain!
ABCD’S OF THE GRAIN TRADING HAVE TO BECOME MORE AGILE
All right. Do you expect any consolidation move in ABCD’s of the grain trading? There are many takeover rumors regarding Bunge?
Potentially yes. And of course there are a lot of talks around Bunge – the company is getting cheaper every month, shareholders are not happy and the previous CEO had to step down just recently.
Maybe in some cases, it will be consolidation but I think the major trend could be that those large companies, they will have to become more agile and much faster to compete with the medium-sized companies and to deal with more educated farmers. In some cases, this may lead actually to deconsolidation as large companies will have to sell some of their business to remain competitive.
Looking forward to grain markets, what are the key factors that determine the wheat prices in the next season? Where are wheat prices to go?
I think the prices should be close to the level which we saw and which we see in the current season. We are getting close to the end of the season. Stocks are getting lower worldwide and in majority of the exporting regions as well. Actually, among exporters the number one country with still large stocks is the US. But in other regions stocks are depleting, stocks are shrinking. So that’s one point which is supportive.
At the same time, we don’t have any issues with, at least for now, with winter crop outlook for 2019. There is some decrease of planting grain in some regions but again in the Black Sea, Ukraine, Russia, wheat looks very good after the winter. In addition, Russia probably planted a new record winter wheat area. If there are no problems with weather, at least serious ones in the Northern Hemisphere, it looks like we might have another bumper crop in the next year as well.
WHEAT PRICES TO BE CLOSE TO THE CURRENT YEAR
If you look at the market now for the Black Sea, the new/old crop inverse is around 40 dollars. Now new Russian crop is quoted around $195/mt. Looking at fundamentals now and provided there are no serious issues in the next five months currently I expect 2019/20 prices to be in $180-250 range.
TRADE WAR BETWEEN US AND CHINA WILL HAVE LONG TERM CONSEQUENCES
My next question is about a hot topic: the USA and China trade dispute. Discussions are continuing between the two countries. Do you believe there will be positive progress in the negotiations?
They potentially can strike a deal sooner or later. And the US will resume its exports to China may be on a small scale because that part of the market already has been taken by its competitors. But at the same time, I think, even they strike a deal, this trade war will have long term consequences as China will try to diversify its imports and it looks like they are going to change the state policy to depend less on imported soybeans by producing more domestically.
By coincidence, there is a fast expansion of African swine fever in China and their livestock industry is not prepared to deal with it. I think the market still hasn’t realized the scope of this story. This may last for years resulting short term in a smaller demand for soymeal.
And as you said at the beginning of the interview, there is a Black Sea effect on the global grain market. Russia has increased its competitiveness in the global market and become the world’s leading wheat exporter. Do you think that Russia could consolidate its leading position in the coming seasons? What is Russia’s chance to remain as the world’s leader wheat exporter?
If you talk about the next season, I think there are good chances for Russia to remain number one wheat exporter again in the next season. Despite lower stocks, crop outlook is very good currently. We have an expansion of area under winter wheat. We have good weather conditions. And if weather conditions are going to be close to average, we expect Russia to harvest 80 million metric tons of wheat which is the second biggest crop after 2017 and which roughly implies exports of something around 35 million metric tons. So exports will be close to this season. Exports are roughly estimated close to this season which implies around 35-37, maybe 33 million metric tons, which will very likely to put Russia on the first place among exporters again.
What is your take on for the next ten years?
If we talk about longer-term perspective, I think Russia still have good chances that it will remain number 1, number 2 wheat exporter depending on the season. So probably there are two major or maybe three major factors to be taken into consideration. First is government policy and government involvement into agriculture, specifically into export regulations. Russia became a huge exporter because the government didn’t mess with the markets and didn’t mess with exports. But unfortunately in recent years government became much more involved in export regulation. Russia has a wheat export tax. Now it is set to zero but it exists and can be introduced again if needed. We have seen that several times in recent years...It all started in 2010 actually. For several times since that time Russia banned or stopped or it introduced temporary taxes, limitations. And that is obviously not good for the business, not good for exports, not good for farmers’ margins and their intention to produce to more wheat. So that’s one point; government and how will it regulate exports. I have met many market participants and they are very concerned about what the government is doing and what they are going to do. So I think that is the number one risk factor if you talk about exports as the perspective of the long term.
The second one is the domestic supply. Farmers in many cases may want to switch from wheat to other crops. For example, it’s happening right now in Siberia, the largest spring wheat producer. They are switching fast from wheat to oilseed, to rapeseed, which is going to China. And I think farmers may continue to switch from wheat to other crops, especially in regions which are distant from ports. In Volga valley, in Siberia, like those regions. So that could be another factor.
The third factor probably it is also quite important. Actually, it is also important both for Russia, Ukraine and also for EU as a huge producer and exporter of wheat what will the wheat market look like in 10 years in terms of biotechnologies, in terms of varieties that have been grown. Right now there are a lot of new wheat varieties which are been bred in different parts of the world, -not in the EU, not in Russia-, that’s CRISPR wheat. That genetically engineered wheat may have new important characteristics like gluten-free or its drought-resistant character but EU already said that we would not allow having this wheat as the same way as traditional genetically modified crops, that is a huge hit for European farmers and European researchers. And I think the same story may happen in Russia and Ukraine where genetically modified crops are also officially banned. And if the rest of the world will be happily producing CRISPR wheat in a decade or maybe in 15 years, I am not sure that Russia could remain and EU as well and Ukraine as well could remain competitive if it is introduced a ban on CRISPR varieties. So I think that is a huge challenge and that should be also taken into consideration.
Besides the export limitation, another concern for the global grain market is the Russian logistical problems to ship the grain to world markets. There is a shortage of wagons, logistic problems in ports and insufficient grain storage capacity. How do these logistic problems affect Russia’s grain exports? And how Russia will address these problems?
There are no issues with storage capacity. It is a myth. It has been repeated every year and year after year but in the majority of the cases there are no storage issues, there are no storage limitations because prices of storage more or less the same. For example, this year and even 2017 when we had a bumper crop there were no big issues with storage. Only for a limited time for the Volga, maybe a couple of months, that is it. Because in the recent decade, I think farmers extended their storage a lot. They have their on-farm storage and also many many farmers, more and more farmers have started to use bags to store their grain. So it is not really a limitation for the exports.
As the logistics and ports; yes, that issue does exist. Russian infrastructure may, at the whole chain, operates more efficiently than everyone thought. For example at the beginning of 2017/18 when the huge crop harvested, we were estimating exports around 40-44 million metric tons not because of supply but because of infrastructure bottlenecks. But at the end of the season, Russia exported 55 million metric tons. More than 10 million metric tons what we were expecting. Infrastructure is relatively efficient. Also at the same time, because of that bottleneck issue, companies are investing heavily in infrastructure. They have been doing that for years but after 2017, everything has intensified because everyone remembers what was in 2017, how the big crop was, how big the supply was, what was the demand for terminal services. And so there are many projects which many terminals are being expanded right now. And also there are several new greenfield projects in the pipeline which are likely to be launched in several years. I think Russia will add at least 7-10 million metric tons of export capacity and probably even more. The owners of terminals are making a lot of money and they can invest more. Again if the government won’t make any decisions that will affect export volumes.