“This year, the grain trade has not been able to build up big long positions of cheap ex-harvest wheat due to the loss of appetite by banks to provide credit. Due to micro and macro factors, banks fell out of love with agriculture this season. Borrowing money for commodity trading has become harder as banks tighten their lending standards. In my view, this will make the market more reactive to the future price moves. This also means, that no matter how sharp price swings are, they allow to capture profit margins to a much lesser extent. Against this background, consistency is the key to success this season.”

Don't count your chickens until they've hatched. The meaning of this widely used Russian saying comes from a farming tradition, that is, counting new-born chicks in autumn because not each of them makes it to October. October is traditionally the month when we can “count the chickens” in terms of wheat production in the Northern Hemisphere, both quantity and quality wise.

Russia, being touted by a wide margin world’s top wheat exporter this season, plays a large role in global food security. Therefore, it is in the spotlights for a good reason and has just set a new record September exports in excess of 5 million tons. Unsurprisingly, USDA forecasts Russian wheat exports for the current season at 37,5 million mt for Russia; 26,5 million mt for United States, 25,5 million mt for European Union; 24,5 million mt for Canada.

The most striking change this crop year, as opposed to the last, is observed in the European Union production and export figure. The latter is down by a whopping one third from last year. France, Germany, Denmark, as well as Bulgaria and Romania have been hit hard by drought, and wheat crops are down significantly. Traditionally, Bulgarian and Romanian wheat are competing with other Black Sea origins right from the very start of the season. However, with wheat crops down by 25-30% this year, competition understandably is not so fierce this year allowing Russia to have a stellar start in terms of both volume and prices.

Until recently, the main source of worries was persistent dryness in much of grain producing areas in Russia and Ukraine, which hampered the progress of winter wheat sowing campaign. After the arrival of much awaited rains in Russia and Ukraine in the last days of September, planting of winter grains is finally off to a late start. The planting window is rather narrow and it does not bode well for the plants if early freezes arrive, but for Russian and Ukrainian farmers it was either this, or taking the bullet of sowing in the extremely dry conditions prior to the rains. Recent rains have delayed harvesting of corn in Ukraine and south of Russia, creating a temporary shortage in the market. On one hand, it effectively removed part of the harvest pressure weighing down on corn prices and, on the other hand, it caused concerns for the quality of corn to be harvested. Mother Nature knows best how to keep the agricultural markets on their toes.

Wheat prices CPT Russian deep-water ports are firm as grain is seen by the farmers as a hedge against macro-risks: both economic and political. Russian farmers are incentivized to hold on to their grain as a hedge against currency depreciation and against other macro risks. Sharp devaluation of the Russian rouble, as it is getting alarmingly close to an all-time high level of 80 roubles to a dollar, is prompting the Russian farmer to hold on to his wheat as it offers a welcome hedge against possible further loss of value by the rouble.

Moreover, a steady appetite for wagons, has brought about a round of transportation tariffs re-negotiations with the leading railway infrastructure operator for the transport of grain and other agricultural cargoes – RusAgroTrans. This resulted in higher inland transportation and higher CPT prices.

Meanwhile, Russian agricultural producers, thanks to record prices of the last season, have not only significantly increased their storage capacities, but also became financially more stable and less loan dependent, especially in the South of Russia and in Central region close to high-capacity sea terminals, which supply primarily to the world markets. Above developments have made it possible for the local farmers not to dump significant volumes of grain onto the market right after the arrival of new crop, but rather to sell it gradually, thus avoiding the slump in prices immediately after the harvest.

Last season was not only characterized by propitious price development, but also by the record quality of wheat in Russia. Due to the growth of Russian domestic consumption and local processing industry we have seen a significant increase in competition for grain from the domestic market, which provided a welcome alternative for exports. More often than not, in the past season internal market was a driver of prices when the FOB prices came under pressure weighed by sluggish international buying interest.

An important event in the past months was relaxing of quality specifications on wheat allowing the opening of Saudi Arabia for Russian wheat followed by unrelenting talks of Algeria doing the same. Deliveries are yet to start, but speculations are widespread that whereas France due to drought slashed wheat crop this season and can allow itself the luxury to miss Algerian market altogether, next season it is bound to suffer greatly, if Russian wheat indeed enters into competition with historically dominant French origin at the Algerian market.

On the other side of the Atlantic, CBOT wheat also went higher during late August, partly supported by China's ongoing grain buying spree. However, price moves in Chicago have been milder and the market as a whole has behaved rather as a follower, not a leader. CBOT did react to corn downgrades in the States (derecho, dryness in western Iowa with ensuing downgrades in quality and yields) and, in part, to the developments in other wheat markets, but these moves only accentuated its current role of a price trend follower. European grains futures prices on the MATIF and the Black sea market have been much more interconnected. MATIF has promptly reacted to the underlying fundamentals in the Black Sea region, with a strong rally in the last weeks of August and first weeks of September.

This year, the grain trade has not been able to build up big long positions of cheap ex-harvest wheat due to the loss of appetite by banks to provide credit. Due to micro and macro factors, banks fell out of love with agriculture this season. Borrowing money for commodity trading has become harder as banks tighten their lending standards. In my view, this will make the market more reactive to the future price moves. This also means, that no matter how sharp price swings are, they allow to capture profit margins to a much lesser extent. Against this background, consistency is the key to success this season.