In the dynamic world of grain trade, impartial price reporting is emerging as a critical tool for addressing multifaceted industry challenges, from geopolitical shifts to weather variations. Beyond its role in supporting financial instruments, price reporting enables the sector to develop tailor-made risk management tools. Bringing transparency, certainty and confidence to trading decisions is at the core of all price reporting activity, and such services work in conjunction with analytical and forecasting services, along with news and commentary to give you a full picture of how these critical markets work.

Tim Worledge
Managing Editor
Fastmarkets

The role of independent price reporting in the agriculture markets is steadily establishing itself as a vital component in responding to the multiple challenges that the sector faces.

Much of the focus to date has been on building the sort of services that the sector is famous for – impartial, independent prices assessed to a robust methodology that enables the development of derivative financial instruments. 

While that has to be a major part of the response to challenges that span geopolitics, war, weather, currency fluctuations, biofuels and changing supply and demand patterns, impartial pricing has a much wider potential use in day-to-day trading. 

Price reporting, as a discipline, is key element in allowing the sector to develop its own risk management tools – instruments that are tailored to the rise of Brazil as a major exporter, or to China as the destination for so much of the world’s agricultural production.

A raft of new instruments, listed on major international exchanges, have already highlighted the potential – although the instruments themselves have weathered a variety of real-world experiences.

The breakthrough financial instrument was the Black Sea wheat futures contract – a collaboration between price reporting agency S&P Global and the Chicago Mercantile Exchange, the new futures contract was launched in 2017 to cater for changing trade flows. 

While it met with initial success, building liquidity through steadily growing open interest, the cocktail of geopolitics that it was in part built to cater for ultimately proved its undoing. 

The rise of Russia as the world’s biggest wheat exporting nation meant that existing contracts hosted by both the CME and Europe’s Euronext could not fully manage the risk involved in the increasingly significant export hub.

A new tool was needed, but in catering to the rising Russian supply, the contract inherently developed an Achilles heel. Being so closely aligned to Russian trade patterns meant that it inherited the consequences of every government decision made in Moscow. 

Although the Russian invasion of Ukraine brought further complications to trade across the region, including for the Black Sea wheat futures contract, the roots of its decline lay in the imposition of a Russian export tax level that was imposed and revised on a weekly basis. 

That made it hard for traders to take forward positions – a key element of trading – as no party would have full visibility on what tax level they could face when it came to execution.

A potential solution could be to move away from origin-based pricing and instead look at destination pricing – a concept that would remove some of the seasonality that typically accompanies exporters, although doesn’t necessarily address the potential geopolitical issues. But here too there are opportunities for pricing that go beyond derivative instruments.

Many of the world’s main importers still use tender-based buying as their main approach towards securing supply – a tried and trusted initiative that encourages competition and brings a degree of price management.

In tendering, buyers can set out the framework of what they need to buy and invite the industry at large to send their best price to secure the business in a process that still allows the buyer the option to walk away if none of the offers meet expectations.

It’s a system that has worked for decades, if not longer, bringing a degree of transparency and an alternative form of price discovery, but it has drawbacks – not least the sheer scale of some of the buying that is now managed through a tender process.

One of the most prominent exponents of tenders has been Egypt’s General Authority of Supply Commodities (GASC), who have issued 30 tenders in 2023 alone, securing 80 cargoes of wheat, corn, sunflower oil and soybean oil along with them.

Collectively, 5.1 million tonnes of agricultural product has been secured through tenders in 2023 alone, at an average price of $663.18/mt according to Fastmarkets Agricensus data.

Of that, a cool $1.3 billion was spent specifically on wheat, although even that represents a saving from the $2 billion spent in 2022, as the Russian invasion of Ukraine first raged.

That’s come at a cost, with Egypt’s current buying for the ten months to October roughly half a million tonnes shy of the full 2022 figure – but there has been an evident focus on buying in bulk in 2023, as 16 tenders have resulted in 39 cargoes and 4.5 million mt of wheat. 

That averages at 117,000 mt per tender, up from an average of 64,000 mt per tender in 2022 and an average of 60,500 mt in 2021.

While Egypt has found funding support from World Bank loans, another approach has been to vary the types of deal concluded or to deal privately with sellers and avoid the entering the tender arena.

Volume is key here – the anticipation of the world’s biggest wheat buyer advertising that it needs to buy wheat is usually enough to draw support to wheat prices creating an unfavourable loop that punishes the country for being the biggest wheat short.

Other end users across North Africa and the Mediterranean have also changed tack, with Algeria changing quality specifications in the face of rising prices in a bid to attract a wider range of suppliers. 

Battered by an unsympathetic currency exchange rate, Turkey’s state-backed TMO has also pared back its tender activity in recent years, with the agency overseeing 26 tender and buying 209 cargoes in 2021.

That had dropped to 22 tenders but increased to 238 cargoes in 2022, but stands at just six tenders in 2023, yielding 81 cargoes, according to Fastmarkets Agricensus data, with buying now done on a delivered basis as well as ex-warehouse (EXW). 

One of the world’s biggest wheat importers, Saudi Arabia’s SAGO, has largely abandoned its state-driven buying activity as the country privatised the sector as part of a raft of reforms – so tender-based buying has had to move with the changing times.

For some that can mean letting go of established, proven procurement processes, and that isn’t a decision that is taken lightly. 

But this is another area where price reporting can help – committing to delivering a daily, assessed price that reflects market values allows buyers to structure deals that can mirror market value and secure the bulk of supply at a market value. 

Contracts that use pricing formulas can remove some of the stress around securing supply, without removing the option to buy through tenders or using other mechanisms if the buyer still wants to. 

Fastmarkets Agricensus publishes a North Africa wheat price, establishing a value for the imported price of wheat into the region on the basis of the FOB price for five major international exporting countries, plus a freight value to deliver it into the North Africa region.

The table overlays the Fastmarkets Agricensus North Africa wheat price with a variety of values for Egyptian, Tunisian and Algerian wheat tenders in recent months and – aside from a handful of exceptions – there is correlation and in many cases alignment. 

Bringing transparency, certainty and confidence to trading decisions is at the core of all price reporting activity, and such services work in conjunction with analytical and forecasting services, along with news and commentary to give you a full picture of how these critical markets work.