Black Sea wheat: Napoleonic plan 2021/22

06 June 20219 min reading

After April’s lack of rain, May brought more moisture and better prospects of world wheat harvest 2021/22. Apart from the abundant crop, May WASDE report showed that American analysts also foresee Russia to preserve its place of #1 world wheat exporter in 2021/22. We should note, that even in case Russian wheat crop 2021 would be closer to 81 MMT as per SovEcon vs. 85 MMT in May USDA report, this decrease should be compensated with higher by about 5 MMT y/y beginning stocks. Will Napoleonic export plan come true and what could be the main obstacles for its achievement?

Christina Serebryakova Agricultural Commodities Broker Head of Analytical Department

USDA’s 2021/22 copy-paste of previous highs for Russia-Ukraine-Kazakhstan

Recently market participants were joking about USDA’s method applied for 2021 crop defining in the highly awaited May issue. Some people said that it seems like American analysts just copy-paste previous highs, as market was buzzing about abundant wheat crops expectations in the key Black Sea countries. Thus, for Kazakh wheat crop 2021 USDA put 14 MMT (at a quite high level of the previous year); for Ukraine forecast is +3.6 MMT y/y to 29 MMT (almost same like a record 29.1 MMT in 19/20) and for the biggest Black Sea star – Russia, USDA analysts see wheat production 2021 at 85 MMT (almost same like last year's record of 85.4 MMT). Meanwhile, SovEcon analysts do not agree with the USDA, and cut their forecast of Russian wheat crop forecast 2021 at the end of May by 0.8 MMT from their mid-May report to 80.9 MMT on a “smaller winter wheat area, big winterkill in eastern Black Earth and Volgograd and rapidly deteriorating weather conditions in spring wheat region thanks to recent dryness. This was partly offset by a marginally higher winter wheat yield on better crop conditions and a bigger spring wheat area thanks to current rapid planting (this also reflects huge replanting in the Center)”. We should note that as of 28 May, Russian AgMin noted, that the spring wheat had been planted over a new record 11.8 MLN HA, which is 92.9% out of plan. Agritel underlined, that it means, that “Russia has caught up spring crops planting campaign, despite a relatively cold spring and a slow start of operations”. SovEcon also noted “The next few weeks weather is the key. Russian spring wheat regions (Volga, Urals, Siberia) urgently need rain. In many cases, topsoil is absolutely dry. Good rains at last predicted for Siberia, which is #1 Russian spring wheat grower, and parts of the Urals. Spring wheat accounts for around 30% of the total Russian wheat crop”.

Romania & Bulgaria to get back in the Black Sea export game

The MARS noted, “in Romania and Bulgaria, crops continue to benefit from favorable weather conditions characterized by slightly below average temperatures and persistent rainfall. These regions also faced a drop in temperatures in April, which slowed down crop development in Bulgaria, while it had almost no impact on crops in Romania (e.g. Macroregiunea Patru)”. Better weather conditions promise improvement of wheat crop in 2021 after the last year’s dryness. European Commission forecasts Romanian and Bulgarian wheat production 2021 at 9.12 MMT and 5.78 MMT, +2.7 MMT y/y and +1.1 MMT y/y, respectively, which is close to 2019 record figures of 10.28 MMT and 6.12 MMT.

June rains could cause fungus diseases & further delay the harvesting start

According to Agritel, “the Romanian plains as well as those of central Ukraine and the Russian Kuban have been well rained over the last 7 days with more than 30 mm. For the next 7 days, weather models anticipate equally heavy rainfall, even in areas that have remained dry recently, namely south-eastern Ukraine and the Russian Central District. These rains bode well for the production potential of the widely spiked wheat in the region, although adequate fungicide protection will be needed to preserve the quality of the future crop”.

France and other competitors snap at Black Sea’s heels

The main competitor of the Black Sea in the North Africa is the EU, namely France. According to the EU Commission, French soft wheat crop 2021 could increase by 6.4 MMT y/y to 35.5 MMT. In May, MARS noted, “in France, despite the dry conditions observed in April, biomass accumulation is proceeding in line with the average (e.g. Centre). The impact of the dry conditions on biomass accumulation was mitigated by cold temperatures that reduced water demand and evaporation”.

The USA and Argentina, which are the main Black Sea competitors in Asia, are also expected by the USDA to harvest good crops: the USA – 50.9 MMT (+1.3 MMT y/y and currently market is watching closely return of rains in the US plains), while for Argentina – at a record 20.5 MMT, + 2.9 MMT y/y. But for Argentina it is very early to believe in such a record crop. As of 26 May, wheat planting in the country is done on 10% out of 6.5 MLN HA plan. Such pace demonstrated a delay of 3.3% y/y due to recent rains.

The last two competitors of the Black Sea countries in the market of Asia are Australia and Canada, and they are also seen to have quite a decent crop, although figures in 2021 are expected at -6 MMT y/y for Australia (it is also very early to rely on this figure) to 27 MMT and at -3.2 MMT y/y for Canada to 32 MMT.

Fight for destinations

Africa is going to stay #1 destination for the Black Sea wheat. Egypt should stay a key importer here, with expectation of increase in purchases in 2021/22 MY by 200 KMT y/y. But on this market, the competition will be very tough between the Russian, Ukrainian, French and Romanian origins. The export duty on Russian wheat causes uncertainties and worsens its competitiveness even despite good crop prospects. Evidence of this was the failure of Russian grain in Egypt's first tender for the purchase of wheat of the delivery in the new season, when the victory went to the Romanian rival. Algeria, Ethiopia and Sudan are seen to raise wheat import by 1.1 MMT, 0.5 MMT and 0.2 MMT y/y. Algeria, which is rebuilding its stocks, is a focus for the French wheat, Ethiopian market should be shared more equally between major origins, Sudan looks to be EU and Russian competition space. Morocco, Tunisia and Nigeria are expected to cut wheat imports, which means less possibilities for Ukrainian grain in the first two countries and less interest for the Russian wheat from Nigeria.

Middle East is expected to stay mainly Russian affair, due to the country’s dominance in Turkey, which is expected to increase wheat import by 1 MMT y/y, as per the USDA’s May report. Also, Russian wheat behaves very impressive on Iranian and Syrian markets. Russian products enjoy a preferential access to the Iranian market, granted by the provisional trade agreement between Iran and the Eurasian Economic Union. As for Syria, Interfax was reporting, that Russia plans to supply Syria with up to 1 MMT of wheat in 2021, of which 350 KMT have already been delivered this spring. Jordan is supposed to reduce purchases in 21/22 season by about 300 KMT, thus more Romanian wheat could go to other destinations, most possibly Egypt, Philippines, Israel, Sudan, Lebanon or Libya.

Competition in Asia is promising to be tough. Ukrainian wheat should improve its positions in Indonesia and in the Philippines, as well as both Ukrainian and Russian crops should have good demand from Bangladesh. Meanwhile, Chinese market is going to be mostly the USA/Canadian/French competition and here the volume of import is believed to decrease by 0.5 MMT y/y. The major decrease in Asian wheat import is expected by 2.8 MMT y/y for Pakistan. This destination was mostly covered by Russian and Ukrainian wheat in 2020/21. Thus, a heavy surplus of grain could search for its new home in 2021/22.

Price decrease during harvesting: to be or not to be

Last year many importers highly awaited for traditional price decrease during harvesting. But it was not as obvious as previously. At that time, prices were supported with a later start of harvesting and wheat stocking via major importers due to COVID. This year also some support for prices could come due to later start of harvesting, although so far pressure is noticed due to forecast of higher wheat crops in major producing countries. At the same time, some quality inspection companies are already starting talking that in case of long period of June rains, which are currently forecast for Ukraine, not only decrease of quality parameters, but also grain lodging is possible, which could lead to yield losses during the harvesting campaign. Thus, the downward corrections of Ukrainian wheat crop are not excluded in June-July.

As of 28 May 2021, the price of the new crop wheat for August delivery reached $255/MT FOB Novorossiysk for 12.5% protein and $242/ MT FOB Berdyansk for 11.5% protein. It showed decrease by $20/ MT compared to the prices as of 09 May 2021, but it is still $53-55 above the prices of the new crop wheat same time last year. Also, it is very important to note, that for the first time since 2015/16 MY, since end of March 2021 Ukrainian corn prices appeared higher than wheat. It gives more chances for wheat in the feed industry.

[box type="shadow" align="" class="" width=""]Factors to watch: • Development of weather in the US: rains in May pressured prices, Kansas crop tour found yields above-average, further development to be watched; • Wheat crop development in the BS; more rains are forecast for June; fungal diseases could take place; delay of harvesting start could lend some support to prices; in case of long rainy periods lodging of grain is possible, which could lead to yield losses during harvesting; • Rains came to Europe after April dryness, improving winter cereals yield prospects; • Rally in corn prices could switch more demand to wheat; it is important, how low would be the final crop figure in Brazil, facing worst dry spell in 91 years; • SovEcon noted, “Russian floating wheat tax kicks in on 02 Jun 2021. The first week it will be $28/MT”. SovEcon expects a substantial rise in wheat exports in June thanks to a lower tax rate. Till 02 June 2021, the rate is fixed at 50 Eur/MT ($61). This is bearish wheat in a short-term. • Chinese feed demand for wheat, Chinese stocks; • Official and unofficial export regulations in the Black Sea and other exporting regions • Demand from major importers[/box]

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