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High prices are treated with high prices

05 July 20227 min reading

High prices are treated with high prices. The reduction in wheat production in key regions, the war and the blocking of Ukraine's ports by Russia are already included in the market's expectations. In the absence of news, we will begin to gradually decline, although there is no need to talk about a return to the usual price ranges. The world still needs to make up for the damage caused by Russia's lockdown and military aggression.

Elena Faige Neroba
Business Development Manager
Maxigrain



Russian analysts continue to echo the government and raise their forecasts for wheat production, and along with them, the potential for exports. The numbers are approaching 90MMT, which, had Russia not committed a war crime, would have allowed them to export at least 42MMT. In view of the policy pursued by the Russian Federation, it is impossible to verify the area data. 

The militarization of food has become one of the tools of manipulation. But the lack of a fleet, difficulties in accessing financing, and reputational risks have made Russian wheat an unpopular commodity. This was clearly shown by the latest tenders of countries where Russian origin was leading before the war. In order to spur the interest of buyers, the government has changed the formula for calculating the export duty. In fact, lowering the duty is a necessary measure, because dumping is the only way to sell (even in conditions close to starvation) the grain behind which there is a war crime. Well, the conversion of the duty into rubles is a huge risk for the exporter. The ruble exchange rate is artificial and completely controlled by the government. Talk about the fact that it is uncomfortable for exporters has been going on for a long time. The risk is that at a certain moment when the ruble weakens, the duty can instantly increase significantly and make the deal unprofitable. 

In addition, the story of stolen grain sold from the occupied ports has reached a new level. If earlier grain was loaded in the Crimea with systems turned off, and the origin of this grain could be proven by circumstantial evidence, now the Russians themselves have said that they are shipping grain from recently occupied ports. But this bread smells bad, and Turkey, despite the position of the mitigator, has taken the side of morality, logic, common sense and law.

The outlook for Ukrainian exports remains bleak for now. Volumes in June were 44% lower than last year. A significant increase in June exports compared to April (March is not indicative) was provided by logistics through the river ports of Reni and Izmail. More than 1MMT of grain and by products is 55% higher than market expectations at the beginning of the war. Unfortunately, the work of these ports depends on the Romanian pilots, and the traffic jam from boats does not decrease. With the start of active trading in the new Romanian crop, these volumes may decrease, at least in the first half of the new season.

Tender activity is gaining momentum. But this season, the purchases of state operators began later than usual, and therefore they are carried out in large volumes

In the absence of news, the market is in a downtrend. As the new crop approaches, a number of non-key players are already easing export restrictions. According to media reports, Germany's proposal to temporarily cut biofuel consumption in the G7 failed to gain support at the group's summit, with the US and Canada reportedly leading the opposition. A Reuters report on June 26, citing an unnamed source, said US and Canadian officials cited the spike in fossil fuel prices over the past few months as an argument why the G7 countries should refrain from imposing waivers on biofuel mandates. Reuters reported on June 23 that Germany and the UK will ask other G7 countries to consider lowering biofuel blending requirements to free up grains and vegetable oils amid fears of a global food crisis.


As of June 21, China's wheat harvesting campaign is 99.2% complete, about 20 million hectares of wheat harvested, the average yield is 6-6.5 tons per hectare, so the production will be about 120-130 million tons. Chinese experts expect this year's harvest to be the largest in 20 years. This raises suspicions, especially after information about the critically weak state of winter crops in the spring, as well as recent floods.

Favorable weather conditions in Kazakhstan have supported the outlook for the country's grain production, while average yields should be above last year's results and the five-year average, MARS reported. Winter cereals showed an average level of development and growth, as sufficient soil moisture and moderate temperatures ensured sustainable development during most of the growing season, especially in the south and west of the country.

According to the latest BAGE report, Argentina's wheat area forecast was cut by 100,000 ha due to dry weather and is now expected at 6.3 million ha. The planted area jumped 14.5 percentage points in the week to June 22, to 61.9% of expected area, but remains nine percentage points below last year's pace. According to BAGE, the lack of surface moisture in much of the central and northern parts of the country's agricultural land limits the advancement of crop areas.

By the end of this year, meat processors won 200,000 tons of beef from duty-free imports to the Russian Federation, but this had a negative impact on the business of Russian farmers. They cannot compete on price with suppliers of raw materials from abroad, which are at least 25% cheaper and have practically stopped selling livestock for slaughter. Farmers are not ready to cut prices due to increased costs, including for feed. In the foreseeable future, market participants warn, the current situation may force many farms to abandon the cultivation of cattle, which will lead to an increase in the dependence of the domestic market on meat imports. This will affect the growth of feedstocks, and as a result, an increase in export potential.


A similar situation with stocks and in China. After the rapid increase in the number of pigs, the market began to refuse expensive meat, and the number began to decline again. In the warehouses of processors, stocks with a high cost are stored, and therefore, until "expensive" feeds are sold at a price acceptable to processors, a significant reduction, even with a fall in prices for meal, is not worth waiting for. In the case of China, this will reduce the import of a number of products and will also put pressure on prices.

A study by Brazilian consultancy Céleres predicts that China's corn imports will rise to 60 MMT per year in a decade. This is because China's yields are lower than those of the world's major corn producers, and also because China has removed corn from the list of foods the country needs to be self-sufficient in. This change was previously applied to soybeans, resulting in a sharp increase in imports to China. Whether this forecast is being realized is now difficult to judge.

High prices are treated with high prices. The reduction in wheat production in key regions, the war and the blocking of Ukraine's ports by Russia are already included in the market's expectations. In the absence of news, we will begin to gradually decline, although there is no need to talk about a return to the usual price ranges. The world still needs to make up for the damage caused by Russia's lockdown and military aggression.

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