Crouching Tiger, Hidden Dragon: Russian vs. Ukrainian milling wheat 2019/20

13 December 201912 min reading

First half of 2019/20 season differs from previous years by increased exports of Ukrainian wheat to destinations, traditionally dominated by Russia. For the second year in a raw Ukraine surprises with its unprecedented crop. This time “Hidden Dragon” harvested the record amount of wheat, while in 2018/19 corn crop reached its peak. Furthermore, improved Ukrainian wheat quality is cited by the most of analysts as a main reason of its better competitiveness in 2019/20. To differentiate quality factor from the rest of other milestones, Atria Brokers interviewed the representatives of key destinations in the industry and the picture became clearer.

Christina Serebryakova Head of Analytical Department & Agricultural Commodities Broker Atria Brokers

ABUNDANT CROP MADE ITS JOB 2019/20 MY start… Ukrainian market operators come to the understanding that they are dealing with a record wheat crop with higher protein content than normally. They are fighting to convince Turkey that it should stop looking for Russian 11.5% protein milling wheat, as if it is there, it is located in distant regions and will come to ports closer to the second part of the season. Moreover, as well, Ukrainian sellers were impressing the #1 wheat flour exporter that the quality & price of its 12.5% protein wheat is worth of it. Moreover, this time Ukraine also offered a respectable 13.5% protein wheat specifications at a reasonable price. In such a way, what we are having? November USDA shows Ukrainian wheat crop at a record 29 MMT. During July-October 2019/20 Ukraine raised its wheat sales to Turkey by almost 6 times per year to 690 KMT vs. 125 MT last year. At the same time, Russian wheat continue dominating in Turkey. Its export to this destination during July-October 2019/20 increased by 1.8 times to about 3.87 MMT vs. 2.14 MMT last year. Here two factors played its role. From the one side, Russian crop failed to reach a new record, but anyway amounted 74 MMT, which is the 2nd largest ever. From the other side, Turkish wheat crop appeared lower than expected and in November USDA was shown at 19 MMT (same y/y).



“This season we experienced higher energy (W) and sedimentation results from the Ukrainian wheat compared to last year. It can be said that there is a slight positive trend in Ukrainian wheat in terms of quality for the last five years, but on miller`s perspective, concerns on the stable quality of Ukrainian wheat remained unchanged versus long years experiences and positive knowledge on Russian wheat quality. Still price advantage of Ukrainian wheat makes the origin tradeable. What we observed about Russian wheat, that the quality is ok – each year we are receiving more or less stable results but we don`t see any sharp improvements on the structure of wheat. The performance of wheat looks weakening. This season most probably because of the dry season, on Russian wheat, we experienced high falling number (FN) and energy (W) levels compare to last season. However, have in the limit gluten levels”.

MORE FOOD, LESS FEED QUALITY Other important feature of the first half of the season is that Ukrainian wheat export to Egypt during July-October 2019/20 increased by more than 3 times to 1.64 MMT vs. about 480 KMT same time last year. Here played its role increase of the share of milling wheat vs. feed wheat in Ukraine in 2019/20 by about 5-10% y/y to about 60%. In Russia, milling wheat share also upped by about 15% close to 80%, but price competitiveness of Ukraine was very strong. The reason is that Russian farmers changed their sales strategy to “Crouching Tiger” type. While in 2018/19 they were scared of possible limitations of exports, this year they had a sigh of relief, as no emergency signs from the government were seen. Thus, Russian wheat export to Egypt during July-October 2019/20 decreased by 23% to 2.33 MMT vs. 3 MMT last year.



“Talking about Ukrainian milling wheat with 11.5% protein, this year the gluten was about 25-27%, which is considered high compared to last year’s results; however, it is still considered lower in quality compared to the current Russian 11.5% protein wheat. The alveograph analysis results of average sample of Ukrainian 11.5% wheat is P=123, L=49, W=220, P/L=2.51. One of the main concerns regarding the Ukrainian wheat this year is that the Protease enzyme is very active which results in bad results in baking.

Talking about Russian 11.5% protein wheat, gluten content ranges from 23% to 25.5%, which is lower than last year; however, it is considered to be much better than Ukrainian milling wheat with 11.5% protein. Here is a sample of alveograph analysis of Russian 11.5% wheat: P=100, L=66, W=270, P/L=1.51. This wheat gave great results in baking”.

GLUTEN QUALITY ALERT 2019/20 MY indeed was noted with better Ukrainian milling wheat quality: falling number (about 370 sec vs. 310 LY), protein on dry basis (about 12.5% on average vs. 12% LY), wet gluten (above 26% vs. about 22% LY). Herewith, it also have not managed to escape some troubles: it has lower test weight compared to previous season (about 78.7 kh/hl vs 79.9 LY) and lower deformation energy W (about 207 10-4J vs. 280 LY).



“For us, as a mill, rheological characteristics of the wheat are very important. This year we are experiencing problems regarding the quality of gluten for both Ukrainian & Russian origin (in our structure of import Ukrainian wheat is taking about 90% this season). I am referring to the P value. As higher P value enables bakeries to produce bread and muffins, lower P produce mostly sponge cakes. Our alveograph is demonstrating very good L (higher than 80) and W values separately, but the P value is less than 60, which is low for us.

As an example, find a screenshot of an alveo result for Ukrainian wheat that has high wet gluten amount (31%), yet P value is less than 50, in such wheat that is graded as 14.5% protein, the value should not be less than 90. We were ready to discuss real wheat offers with P value higher than 75. But exporters were ready to guarantee only the gluten index, as most of sellers collect export batches very fast and do not have time to keep some batch separately and spend extra-time for analyzing it for alveograph characteristics (P, L, W).”

TRAPS AND PITFALLS OF A HOT WEATHER At the beginning of 2019/20, Ukraine has showed average test weight a bit lower than in the previous season, especially in south regions of Ukraine. This situation was expected to improve towards the middle of the season due to the grains coming from north regions of Ukraine. In order to understand the reason of this trend, as well as to answer the question about lower quality of gluten this season, we came for the comments to surveyor company.



“In general, quality of wheat 2019 in Ukraine can be considered as good: higher than usual level of Protein and Wet Gluten, and W parameter on average above 200. Although, there are still concerns in regard to atypical ratio between protein and gluten content, quality of wet gluten and thus rheological properties of wheat. It is also worth to mention average figure for W at lower level than in a previous season and P/L ratio that is quite chaotic.

This year we see some parcels with high protein content and other quality parameters at good level, but with very low W (around 100). Still, bug-ridden grains may be below 1,5%. Also, it is evident that this season with all quality parameters being on average at nearly the same level as in previous seasons, the backing properties of wheat are quite different. Wheat performance / dough behavior differs on some parcels in comparison with traditionally known for Ukrainian Milling wheat of previous seasons.

It means that on some particular parcels, with Protein, Wet Gluten quantity, Falling number and W being within contractual specifications, the final product (bread) does not satisfy the expected requirements, which may cause discontent of some final receivers.

This situation can be caused by the combination of several factors. We assume, the main factor is that quality of protein is quite sensitive to weather conditions (i.e. high temperature and lack of humidity) that provoke weaker bonds/the disruption of bonds between molecules of the proteins and also influence a change in a quantitative ratio between protein molecules. With high level of protein and gluten content, the quality of gluten is poor and dough is weak. Among other influencing factors are increased quantity of insects (incl. Eurygaster) due to favorable weather conditions together with the usage of seeding material not resistant to Eurygaster`s ferments and poor quality of the soil due to the lack of proper fertilizer application schemes (to save money due to difficult financial conditions). It is also worth to mention a possible high variability in W parameter between lots corresponding to one vessel.

Please see below example:

Composite sample

As chart above shows, W results demonstrate high heterogeneity between lots within one vessel load. While average W and a composite result show about 200 figure, W on some lots are near 100 figure. Such heterogeneity can predict to some extent, inconsistent results in bread making experience from such wheat parcel.

We can assume that such situations could be also caused by mixing of feed wheat to milling wheat during formation of exported batches (which is associated, among other things, with the changes in the local standard for wheat that prescribes class 4 to be considered as both feed and milling). At this, only Protein parameter is taken into consideration in disregard of rheological characteristics.

Sublots samples

In view of this, we assume that (1) homogeneity of wheat should be considered/tested, (2) depending on a final product the wheat is targeted to produce (noodles, flat or formed bread, etc), a degree of suitability should be evaluated. Even for the parcels showing good results for usual rheological parameters prescribed by the contract, some additional testing should be carried out in order to receive an extra information for deeper understanding of rheological characteristics of each particular wheat parcel and to be able to evaluate and work out the customized approach for further bread backing process (preparation of the technological map, maintenance of technological conditions, proper fermentation time, etc).”

PRICE TREND REFLECTIONS: CROUCHING TIGER COULD WIN FROM CHANGED EXPORT STRATEGY As of end of November 2019, Russian wheat 12.5% protein prices increased to about $209/MT FOB port for December delivery.

It is the 2nd peak for this season and most of market analysts are on the bullish side. Combining the trend of previous years to the domination of current bullish factors, we could not exclude that within about 3 month, Russian wheat prices have the potential to increase by at least 4-5%, heating the prices of other origins as well. We are not going to influence the readers’ opinion; we are just underlying the factors.

Bullish • Higher demand in advance of the New Year holidays • Reluctance of Russian farmers to sell wheat at current levels • Additional demand for Russian wheat, coming from Kazakhstan (Kazakhstan may import from Russia a record of 1.5-2.5 MMT of grain this year due to lower inner crop) • Agreement for Russian and Kazakh wheat supplies to Iran (about 3 MMT) • Tariff-free import quota for 750 KMT of wheat import to Brazil • Uncertain future of winter grains in Russia and Ukraine (although analysts are underlying that the risk of winterkill is low so far) • Forecast of lower EU wheat acreage 2020/21 by Strategie Grains (-0.1 MLN HA to 23.7 MLN HA due to decrease in the U.K. and France) • Expectations that U.S. winter wheat acreage to be the lowest in 110 years • Possible decrease of wheat crop in Argentina to 17 MMT vs. 20 MMT in November WASDE • Expectations that Australian wheat crop could drop to about 15.5 MMT vs. 17.2 MMT in November WASDE.

Bearish • Abundant world wheat crop 2019/20 • World wheat stocks at the end of 2019/20 are seen recouping the losses of the year before to broadly match the peak of 2017/18, as per the International Grain Council • Good world crop 2020/21 could not be excluded, so far Russian wheat plantings are higher y/y, condition of grains not bad, although moisture is already required • Algeria is targeting a sharp reduction to its wheat imports to 4 MMT a year, down from 6.2 MMT

In July-October 2019/20, Russia exported 15.6 MMT of wheat, which is 45% of November WASDE forecast of 34.5 MMT. It is below last year’s pace, when 17.4 MMT or 49% were exported on fears of possible government limitations of export. Meanwhile, Russian competitors, such as the E.U., Ukraine and the U.S.A. combined exported about 50% of their export surplus vs. about 40% same time last year. Taking into account that in general, wheat stocks from the previous season are lower in major exporting countries, this factor could lend additional support to Russian wheat prices in the second half of the season (Jan-Jun 2020). Thus, Crouching Tiger strategy could put Russia in the winners in terms of earnings additionally to the expectations that it will preserve its status of #1 world wheat exporter in 2019/20 for the 3rd consecutive year.

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