Whether we like it or not, we cannot analyze grain markets as we did in the past years when we were dealing with the accelerating globalization and free movement of grain, capital and people. All of this is changing dramatically and will inevitably continue to disrupt supply chains in 2023. Without any doubt, we are in for an interesting marketing year.
Natalja Skuratovic
Senior Sales Manager CIS
CESCO EPC GmbH
Turning the page on a new year often involves retrospective glance at the past year while seeking guidance for the year ahead.
The world has undergone dramatic changes over the last couple of years. The supply chain restrictions caused by the pandemic have made place to the supply chain disruptions when the war in Ukraine broke out, and many dramatic changes have ensued, also in the grain markets.
Commodity markets in general and grain markets in particular had to deal with huge amount of volatility caused by war. Fears for the availability of Black Sea wheat were combined with the biggest drought in Europe this summer, which knocked down the European exportable surplus, and sparked the biggest rally in the markets since 2008. Grain prices peaked in mid-May 2022 near record high levels. Since then, we have seen the prices come off the highs, but the markets remain nervous and volatile. The spread between the highs and the lows for French standard wheat delivered big port (rendu Rouen) has reached a whopping 180 Euros per ton! For the sake of comparison, at the beginning of November 2019 a ton of French milling wheat FOB used to be valued at just that - 180 Euros! For obvious reasons no market player fancies to be caught zigging instead of zagging in these volatile markets, while on the other hand, the absurdity and futility of market forecasting has never been so vividly exposed.
Traditionally, a good litmus test for the world wheat price level is Egypt. In their last 2022 tender Egypt’s General Authority for Supply Commodities contracted 200,000 tons of Russian wheat in a World Bank-funded tender held on 27 December at a price of USD 339 per ton for February shipment. Egyptians liked the price enough to increase the initially contracted quantity of 80,000 to the final 200,000 tons. Given the less than clear insurance issues for the Black Sea vessel fixtures involving major additional costs in the vessel price, there is bound to be additional pressure on the Fob values to be be low enough to compensate for that.
China is a huge factor forthe entire commodity complex. The global economic slowdown should dampen their wheat buying voracity that we saw in 2020-2021 marketing year. The USDA estimates that in 2022/2023 Chinese wheat production and domestic consumption will decrease by 2 million tons and 4 million tons respectively compared to the last year, meaning that the spread between local production and consumption will reach 9 million tons as compared to 16 million tons just 2 years ago. There is a mounting concern over global recession, and it negatively impacts the demand side of the equation. Unrelenting Covid and concerns of recession in China could mean that a chunk of contracted feed grain might remain unconsumed and will be rolled into the coming quarter, which does not bode well for the immediate demand and nearby prices.
The last USDA report in 2022 was benign with no major changes in the world S&D. They did cut the Argentinian wheat crop estimate. The Argie crop is almost finished and is estimated at about 11-12 million tons, which basis 6 million tons domestic demand leaves a meagre 5-6 million tons for export against 16 million tons exported last year.
On a different note, Australian crop number was raised by the USDA to a record 36,3 million tons.
Canadian wheat production for 2022/23 is estimated by the USDA at 33,8 million tons, which is 10% above the 5-year record and Canada’s third-largest wheat harvest on record.
In the US the market is impacted negatively by the lack of competitiveness. US wheat is still expensive against EU and Black Sea competition. French 11,5 protein wheat is priced at USD 340 per ton Fob against reported Ukraine offers at USD 300 per ton for spot shipment. EU exports update showed EU wheat shipments still running 5-6% above last year. It comes as no surprise, therefore, that even though the last export figures before the December holidays were better than expected, still exports to-date remain behind the curve.
Russian December 2022 wheat exports were pegged at a robust 4,1 million tons. This is only some 0,2 million tons behind a 2017 record which is impressive given adverse weather in the first half of December and strained logistics. Certainly the weather in the Black Sea and Azov has improved significantly from the very difficult conditions which had a negative impact on the progress of Russian shipments in the first half of December, but there is a cold snap announced in the second week of the new year with temperature expected to drop to 20-25 below zero Celsius without significant snow cover to protect the winter grain, so the situation will have to be closely watched.
The key to the wheat market will be how aggressively the Russian farmers are prepared to sell their grain once they come back to the market mid-January after the winter break. Without a doubt, they still have a lot of old crop left to sell. Russian Federal Statistics Service Rosstat is putting Russian wheat stocks as per December 1 at 25.6 million tons. This could be a potentially bearish situation, and could signal the softening of wheat prices. Weaker ruble certainly helps Russian exports to be competitive. Russian currency has not been this low against the US dollar since the end of April 2022.
In a nutshell, it is the pace of selling offset by the pace of buying against the backdrop of geo-political uncertainty and weather in the northern hemisphere that will determine the direction of the grain markets in the new year.
Having said that, the EU depends on the Middle East for their energy supply. Saudi Arabia used to be the ally of the US, but is now leaning closer to China. On the other hand, China is siding with Russia. In what is considered a political statement, at the very onset of Russian aggression in Ukraine, China’s customs agency approved imports of wheat from all regions of Russia, giving Russia an alternative outlet for its grain.
These recent events were brought about by the major changes in the geo-political landscape which now divides the world into two major blocks and pushes the world further away fom the clear supply and demand based market economy. In the next few years it will become apparent how the trading flows will go, but for now, the current equilibrium is fragile with ensuing potential changes in capital flows and in the flow of goods, among which strategically important commodities.
Therefore, whether we like it or not, we cannot analyze grain markets as we did in the past years when we were dealing with the accelerating globalization and free movement of grain, capital and people. All of this is changing dramatically and will inevitably continue to disrupt supply chains in 2023. Without any doubt, we are in for an interesting marketing year.