13 December 201811 min reading

“Last year it was Russia widening export boundaries and haunting buyers with its record 85 MMT wheat crop. In 2017/18 Russian wheat crop is about 15 MMT lower y/y as per the USDA, and it seemed there is no need in wider geography of sales. Herewith, things changed dramatically and buyers are “haunting” Russia as it offers relevant quality at reasonable price, when most of other origins faced production failure (-13.7 MMT y/y wheat crop in EU and at least -3.8 MMT y/y crop in Australia). Meanwhile traditional buyers, Turkey and Egypt having financial troubles, other destinations, like Saudi Arabia, Algeria and Iraq could open their doors, unless Russia still has as of Dec 01 about 40% of wheat exportable surplus which is about 14 MMT.”

Jet propelled wheat export In 2018/19 Russia faces faster vs. normal wheat export pace. At the very beginning of the season, it was observed as harvesting started earlier than usual at a record pace following hot weather. As of Jul 02, 6.6 MMT of wheat have already been collected in the country. When the government realized, that yield is less than expected, an export curbs cloud came above exporters heads, blowing desire to sell as fast as possible in August and September. Tougher control of quality by Rosselkhoznadzor was introduced at mid-September, pacifying discharges. By Nov 22, Russia exported 23.1 MMT grain (+15% y/y vs. +40% y/y in early Sep), incl. 19.8 MMT wheat (+27% y/y). Thus, Russia has already exported about 60% of all grain surplus, awaited by the AgMin at 38-39 MMT. In wheat terms, it is 57% of exportable surplus, officially expected at 34-35 MMT. On the threshold of the second half of the season, starting Jan 2019, on our estimation, Russia will have about 30% of exportable volume ~10 MMT of wheat out of about 35 MMT total export forecast for 2018/19 MY by the USDA and SovEcon. It is compared 46% (18 MMT) in the middle of record 2017/18 and 42% (11 MMT) in the middle of 2016/17. As well, if last season it was Russia pursuing importers with its record crop, this year those are buyers who looking for diversification of their origination on a lack of world supply and in a bid to boost competition to lower prices.

Macroeconomics bite Russian wheat is performing its maximum during the first half of 2018/19. As per available statistic, during Jul-Sep of this MY, it increased wheat shipments to key markets. Egyptian sales were raised by 26% y/y, and, as prices bite, at the end-November, Egypt’s GASC has asked suppliers to delay wheat shipments, as they are unable to open letters of credit before January, noted Bloomberg, adding, that it seems suppliers may still be willing to ship without a letter of credit being in place. The total of purchases so far in 2018/19 (Jul-Jun) amounts 4.04 MMT out of planned 7 MMT of wheat purchases. Nov USDA forecasts Egyptian wheat imports 2018/19 of 12.5 MMT, almost same y/y with crop forecast of 8.45 MMT, as well same y/y. Thus, Egypt is still need to cover about 5 MMT of wheat import demand.

Russia also raised wheat export to Turkey by 33%, even despite higher y/y prices and currency depreciation in Turkey. Platts noted, the USDA forecasts Turkey will buy 4.5 MMT this MY (about 80% of that is traditionally coming from Russia), although some market sources have put the number as high as 5.5 MMT. However, Platts added, that not all analysts are optimistic that Turkey will buy as much as 5.5 MMT. Some have put the figure at 3 MMT by the end of the marketing year on June 30, 2019, due to the country’s tough macroeconomic conditions and the high price of wheat. Herewith, to preserve its position of number one exporter of flour, Turkey should keep its buying program strong. Due to fluctuations in domestic wheat flour prices, on September 09, 2018, Turkey introduced legislation limiting exports of flour produced from domestic grain to 1% of total exports until domestic prices have stabilised.

Iran could replace Turkey as a buyer of Russian wheat – myth or reality? In the beginning of March 2018, Iran and Russia signed an agreement on the supply of 100 KMT of wheat on a monthly basis. The wheat should be delivered to Iran’s private mills for flour production for exports, as local millers are not allowed to use domestic wheat for flour exports. Thus, competition between Iran and Turkey for Iraq flour market is not in the distant future. Herewith, in September 2018, Reuters mentioned ‘No progress’ on financing of Russia-Iran wheat deal. Apart from flour export purposes, Iran is self sufficient in wheat supplies. As a reminder, on Mar 21, 2016, Iran implemented a ban on Russian wheat import, as some Iranian companies imported foreign origin wheat and sold it to coutry’s reserve as Iranian crop.

China, come back! In February 2018, China lift the ban on Russia’s wheat shipments from six Russian regions (Novosibirsk, Omsk, Altai, Krasnoyarsk, Amur and Chelyabinsk). The ban was set due to Indian and Dwarf smut (Tilletia controversa). And now Russia and China are in talks about more Russian regions being approved to export wheat to China. Russia exported about 18 KMT of wheat to China in 2017.

Russia gives way to US, Argentinean and French wheat, but for how long? In the second half of the season, Russia will ease its wheat export pace on tighter balance, seasonally giving its way to US, Argentina, the EU. The fact that the US wheat came back to the winners in GASC’s tender is a clear sign of this trend. Herewith, Russia does not seem to be upset, as it is focusing on the “quality” side to improve the ground for future and shaking other origins hegemony on their traditional markets. As well, as speeding up the increase of its grain export capacity. According to Rusagrotrans, the total capacity of Russian ports for handling grain for export in 2017/18 was about 55 MMT. By 2022, due to ongoing projects in the South, North-West and Far East, it may increase by 30 MMT. Russia could squeeze the US wheat at Iraqi market After two years of unsuccessful negotiations, new Iraqi Trade Minister Mohammed Hashim al-Aani could support the allowance of Russian origin wheat imports in its state buying tenders and Iraqi delegation could be send to Russia in December. Iraq has an import gap of around 2 MMT a year, which is covered traditionally with the US, Australian and Canadian origins. Currently, the main question is the nature of gluten content in Russian wheat, although, price issue could prevail, as Russian wheat is about $10-12/MT cheaper vs. U.S. HRW wheat shipped to the Middle East, Reuters cited one trader. Plus, Russia increased exports to Nigeria, as well cutting US share there.

Russia’s negotiations with Algeria annoying French exporters In October, the Rosselkhoznadzor discussed with the members of the Algerian delegation the issue of import of Russian wheat. The parties agreed to supply a pilot batch of grain to Algeria for a study, after which a final decision is made. Thus, Algeria might amend OAIC’s terms to allow 0.5% bug damage soon from current 0%. Reuters noted, that FranceAgriMer considers, Russian wheat is not expected to enter the Algerian market this season. If Algeria maintained its import terms, Russia would have to invest in sorting processes to meet the requirements. Meanwhile, France to send grain export delegation to Algeria early next year.

Russian wheat expansion to Saudi Arabia could affect sales from Germany, Poland and the Baltic States

Same as Algeria, Saudi Arabia might amend SAGO’s zero bug damage to 0.5% too from current 0%. Russia is preparing to send wheat samples to Saudi Arabia for quality tests. Such development could hurt wheat export from Germany, Poland and the Baltic States.

Russian wheat flower: inner market is enough Unlike wheat, Russian wheat flour industry is focused on inner sales. The country produces about 9 MMT of wheat flour per year, which is almost totally consumed locally. Annual export of wheat flour from Russia is about 200-350 KMT, leaving it on the outskirts of the list of world wheat flour exporters. Traditionally, China is a major buyer of Russian flour. However, shipments to the country dropped to 13 KMT in Jul-Sep 2018/19 vs. about 30 KMT at the same time last year. Hong Kong imported over 9.9 KMT of flour in Jul-Sep 2018/19 against about 4 KMT in the whole 2017-18 MY.

In November, world wheat flour trade 2018/19 was forecast by the IGC in line with last year’s 17.1 MMT. Iraq is forecast to increase wheat flour imports 2018/19 by 150 KMT y/y to record 2.85 MMT. Afghanistan is also forecast to increase imports by 100 KMT y/y to 3.1 MMT due to a drought-affected wheat harvest. In spite of Turkey, #1 world flour exporter, is dealing with a currency crisis, the IGC forecasts the country’s exports to increase slightly from a year ago, to 5 MMT from 4.9 MMT.

Russia on the way to #2 record wheat crop in 2019 As in late September - early October rains finally stopped in Siberia, and farmers caught up harvesting delays, SovEcon gradually increased its estimate of 2018/19 Russian all grains crop to 110.2 MMT, incl. 70.7 MMT of wheat (#3 highest in Russia’s history), 9.9 MMT of corn and 16.8 MMT of barley.

As for 2019 figures, at the end of November, Reuters noted, that SovEcon forecast Russian wheat crop 2019 to reach #2 highest volume on record of 77.3 MMT (incl. Crimea’s approximate 0.5 MMT), in case of no natural disasters and average yield of 2.8 MT/HA vs. about 2.6 MT/HA in 2018/19.

Russian winter crops planting campaign 2019 was completed at a record pace. High prices pushed farmers to expand winter grain crops plantings to a record of 18.2–18.3 MLN HA vs. 17.8 MLN HA a year earlier with expansion especially in the Volga and Central Federal District.There is some lack of moisture for crops development, although “conditions are dry, but not catastrophic”, noted SovEcon. About 88%-89% of winter plantings in Russia is wheat, thus it is approximately 16.2-16.4 MLN HA in 2019 vs. 15.84 MLN HA in 2018, +0.5 MLN HA y/y. Herewith, total area under wheat for 2019 harvest (both spring and winter) is expected to reach 27.6 MLN HA, which is higher than last year’s 27.3 MLN HA. It is only by 0.3 MLN HA y/y higher, as SovEcon foresees a decrease in the area under spring wheat, as farmers in Siberia are switching to oilseeds production. As well, SovEcon stressed, that cold spell could potentially damage part of the sowings in the European part of Russia in the beginning of December and that the conditions for winter grain sowing in the Volga, the South and Center regions were worse than the average of recent years in large parts of Russia because of the lack of rain in recent months. Reuters noted, that AgResource also stressed “Russia faces extremely dry soil (this autumn), which is a significant change compared with the previous two years”. Rouble depreciation was also mentioned as a factor limiting usage of crop nutrients and imported seeds by farmers. Russian fertiliser producers freezed domestic prices for their products for 2019 winter sowing campaign.

We should remind that this time last year SovEcon made its first projection of 2018/19 Russian grain harvest 2018 at 128.2 MMT after 2017 record of 134 MMT. It included 76.7 MMT of wheat compared to a record 83.9 MMT in 2017 based on expectation that the coming winter will be relatively favourable for winter grains, with 6% of sowings lost.

Q1 to be hot for CBOT As per Rabobank, “CBOT wheat remains elevated in the short term, as demand favours US supplies in early 2019”. At the same time, Rabobank, has “bearish longer-term outlook as an increase in global acreage improves the 2019 supply outlook”. IGC forecast in November that global wheat acreage in 2019/20 to increase for the first time in four years, by nearly 1% y/y, to 220 MLN HA, including predicted gains in the EU, USA, Russia, India and Australia, but dry soils are a concern in many countries.

For those waiting for lower wheat prices... you can wait further 2018/19 global wheat stocks forecast was estimated by the IGC in November at about to 262 MMT, -11 MMT y/y. Herewith, if we exclude Chinese stocks, we will have -22 MMT y/y, which is the first decline in six years, with major depletion in biggest exporting nations Russia (-4.2 MMT y/y), the US (-4.9 MMT y/y) and the EU (-4.6 MMT y/y). Thus, even bigger Russian, EU or Australian crop would not change the firm price trend dramatically.

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