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2020 grain trade: Faster, higher, stronger

18 January 20219 min reading

Christina Serebryakova

Christina Serebryakova Agricultural Commodities Broker & Head of Analytical Department Atria Brokers

COVID-19 impacts on milling and grain trade 2020 was impressive. Sounds like wheat, corn and barley crops 2020/21 are not bad, herewith, the world trade, anyway, is going wild under cover of stockpiling and COVID uncertainty. The Olympic motto “faster, higher, stronger” in this article will have another concept. Trading history 2020 with all its pros and cons is covered below. Metal Bull year promises to be bullish so far…

FASTER… EXPORT PACE

“Stockpiling” became the main topic of grain trade lessons 2020. After 11 March 2020 announcement by the World Health Organization of the coronavirus pandemic and the introduction of quarantine in producing countries, wheat buying spree covered the nations.

Wheat Stockpiling 2020

• Egypt’s GASC raised purchases by 55% in June-September 2020, with the supply ministry instructed to keep six months of strategic reserves. Herewith, GASC slowed purchases in the last quarter of 2020 due to rocketing wheat import prices. The average purchasing price increased by 10% y/y to $227/MT FOB. As of the end of December, Egypt has strategic wheat reserves sufficient for 5.5 months, the supply ministry said.

• Algeria decreased tender purchases. At the end of September 2020, the Algerian government reported the establishment of an upper import limit of 4 MMT of bread wheat per year compared to 6 MMT usually imported, as it is trying to cut spending on cereal purchases in order to ease the impact of a fall in energy export revenue.

• Turkey (TMO) increased buying even in spite of higher year-on-year local crop and currency troubles. Contrary to 2019 year, TMO was an active wheat buyer in November and December 2020. • Saudi Arabia decreased purchases mainly on higher local crop 2020/21. • Tunisia raised purchases by almost 30% to 1.8 MMT due to lower y/y crop. • Pakistan showed the highest increase in purchases after its reserves were found to be smaller than expected. • In the beginning of November, Jordan told, its wheat reserve is sufficient for 18 months. 2020 year’s wheat purchases via tenders increased by almost 40% to about 1.5 MMT. At the end of December 2020, Jordan had already bought wheat for the new crop delivery in the last half of July 2021, while during the previous year, the new crop purchase was done in the middle of January. Price appeared $21.5/MT higher y/y.

wheat tenders

Origination development favors Black Sea: • Russia increased its share in GASC’s tenders by 40% y/y, while Jordan bought within tenders about 240 KMT of Russian wheat, while last year Russian origin was skipped. • Russia received access to Saudi Arabian and Algerian tenders, as importers are widening their origination.

Record Russian Wheat Export Pace

According to Agritel, “Rosstat estimated 2020 wheat harvest in Russia at 85.9 MMT in net weight. The latest mandatory information provided by the AgMin indicated that 88.1 MMT of wheat in gross weight was harvested last summer from 28.9 MLN HA, i.e. an average yield above 3 MT/HA. Losses, mainly due to impurities, amounted to 2.5%. Such a volume is a new record, as the 2017 harvest only amounted to 85.167 MMT. The gap with the last USDA's estimate of Dec amounts to 1.9 MMT, which suggests that the US AgMin will revise up the Russian wheat production soon”. Record crop, combined with importer’s stockpiling, and awaited introduction of export limitations resulted in the record Russian wheat export pace during the first half of 2020/21, amounting 25.4 MMT, +4% vs. the previous record of 24.5 MMT in Jul-Dec 2018.

russian wheat export

After Russia announced its export tax, most traders considered it as bearish in the near-term. But it was bearish for about one week only, and then switched to the upside. As SovEcon underlined, the tax is indeed bullish. “I guess, we should deduct 2-3 MMT from the Russian export number in 20/21 (40.8 MMT)”, said Andrey Sizov, Director of SovEcon. At the end of December 2020, SovEcon downgraded its estimate for Russia's 2020/21 wheat exports to 36.3 MMT from a previously expected 40.8 MMT due to an upcoming wheat export tax. [December WASDE 40 MMT].

Deteriorating Exportable Surplus

Ukraine, in spite of lower y/y wheat crop, kept its export at #2 record pace during Jul-Dec 2020.

ukrainian wheat export Taking into account a draft-depleted EU wheat crop 2020, the exportable surplus of wheat in Russia, Ukraine, the EU and the U.S. are -23% y/y as of the end of 2020 [taking into calculation the latest export forecast for Russia from SovEcon at 36.3 MMT]. It spurred wheat futures on CBOT in the beginning of January 2021 to the highest level since 2014.

HIGHER… COMMODITY PRICES

Price volatility in 2020/21 was really impressive in the first half of 2020/21. We will split it into 5 periods for a short historical flashback.

1) In the middle of June 2020, as it is noted quite often in summer, fears increased about water deficit in Europe. Romania and South of Ukraine were the most affected, with their corn crops hit heavily. This, combined with the fact, that China understood that it is running out of corn, changed the corn price trend to bullish. 2) In the middle of July alarm appeared that French wheat crop 2020 is -21% y/y on weather woes, and dryness could hurt Argentine wheat yields. 3) At the end of August appeared info, that Russia’s deep-sea ports to increase handling fees by ~$3/MT [to ~ $19/MT] from 01 Oct. Frosts and dryness worsened wheat crop prospects in Argentina, while hydric deficit in Europe and BS was raising concerns for autumn plantings. Price support was limited with forecasts of high Australian and Russian wheat crops. In terms of corn, market started cutting Ukrainian crop forecast 2020 from 39-41 MMT to 39-38-36 MMT in August, 33-34 MMT in September vs. Aug and Sep WASDE 39.5 MMT (record) and 38.5 MMT. Autumn loading schedule was intense and farmers were reluctant to sell in this bullish market. Defaults spread the corn market. At the same time, China's AgMin slightly raised its outlook for corn consumption, as recovery of the pig herd grew faster than expected. 4) In October 2020, CBOT wheat reached the highest level since July 2015, as a persisting hydric stress was in place in Russia and South America. Dryness had raised concerns among traders about the prospects for wheat planting in the U.S. Plains. Corn market went crazy after rumors, that Tariff Rate Quota for corn to China could hike to even 27 MMT.

corn 5) In November, drought in Argentina worsened, Ukraine confirmed it is having a 5-year low winter wheat acreage, while Russia announced its plan to introduce a 15 MMT grain export quota for February 15-June 30, but very soon it was decided to increase that volume to 17.5 MMT. In the middle of December 2020, Russia introduced for those period export tax of 25 euros per tonne for wheat. Corn prices were heated by a long dockworkers’ strikes in Argentina. Dry conditions in the South America worsened production prospects in Argentina and Brazil, pushing Argentinean authorities on 30 December to suspend sales of corn for export until 28 Feb. Moreover, market participants were worried that the same fate could hurt wheat export too.

STRONGER … POLICY CHANGES

Stockpiling pushed both importers and exporters to make a lot of amendments in their policies.

Barriers erosion 2020 • At the end of December 2020, Morocco has extended its zero customs duties on wheat imports until 31 May 2021 after introducing “0” duty in the middle of May 2020 until 31 December 2020.

EU wheat • In September 2020, Algeria increased its tolerance level for 12.5% protein wheat to 0.5% bug (insect) damage in purchase tenders from 0.1%, a level which Russian and other Black Sea supplies cannot usually meet. As a reminder, in 2019 Saudi Arabia’s increased its tolerance level for bug damage up to 0.5% (vs. 0% previously). • In the beginning of October 2020 Argentina announced, it is going to approve the commercialization of GMO wheat. But, in the middle of October, Brazilian millers opposed sale of GMO wheat, as importing costs would rise. • On 21 October 2020, to regulate local prices and lessen the load of TMO/Turkish Grain Board, the Government has zeroized wheat, barley and corn import taxes till 31 Dec 2020 at least. Before that, taxes were 45% for wheat, 25% for corn ad 35% for barley. At the end of December 2020, Turkey’s government extended its zero tax on imports of wheat, barley and corn until May 2021. • In October 2020, GASC removed fees for dead insects found in imported wheat

From the other side of barrier • On 01 July 2020, Ukraine’s government and exporters signed an annual memorandum on grain trade rules for 2020/21, keeping export rules unchanged and free of restrictions other than the usual wheat export quota, which was set at 17.2 MMT. • At the end of March 2020, Russian introduced a 7 MMT wheat export quota for April-June 2020, which was exhausted quickly at about 26 April 2020. In November 2020, Russia announced about introduction of 15 MMT grain export quota from Russia from Feb 15-June 30. On 15 December 2020, Russia confirmed introduction of a quota for overseas shipments of wheat, rye, barley and corn (maize) limiting exports to 17.5 MMT for the period 15 Feb 15-30 Jun. It has also decided to introduce a wheat export tax of 25 euros ($30.40) per tonne within that quota for 15 Feb-30 Jun. If export volumes exceed the quota, the tax for wheat would rise to 50% of the customs price or 100 euros per tonne.

Wheat Export • Argentinean authorities on 30 December announced, that they are suspending sales of corn for export until 28 Feb. Exporters were worried that wheat export could be limited as well.

Within the latest GASC’s tender on 15 December 2020, the average FOB purchasing price totaled about $270/MT, which is about +$50 y/y. Ag Resource noted also it is the highest average FOB price, which GASC has paid since May 2014. No Russian wheat was bought for 01-15 February delivery. Swithun Still, Ex Director of Solaris Commodities noted, that nobody wanted to risk offering without a premium [the lowest Russian wheat offer within 15 December 2020 tender was at $285/MT FOB, + $23.15 vs. winning Russian wheat cargo price within 01 December 2020 tender. It was also +$16/MT vs. Ukrainian wheat winning offer]. “We might see France and Australia competitive again for late February-March, once Romania and Ukraine sell their wheat out”, said Swithun Still. The above sentence in general could be applied to wheat trading in the second half of 2020/21. Meanwhile, the price trend is still very hard to predict.

[box type="shadow" align="" class="" width=""]FACTORS TO WATCH •Results of wheat wintering •Official and unofficial export regulations in the Black Sea and other exporting regions •Australian wheat crop results •Wheat/corn harvesting results in Argentina, corn crop results in Brazil •EU wheat export •Chinese and African demand[/box]
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