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14 April 20207 min reading

“The more the press discusses the message that there is a threat of a global food shortage in the coming weeks, the more pressure people put on their governments and the situation can turn into a snowball. Yes, stockpiling will temporarily affect exports and consumption by processors. But we are not talking about any “fragile situation that could soon call into question the existing consumption model”. Stocks will not be stored forever, which means that soon we will face a sharp collapse in exports and "eating up" of these stocks. Even if in some regions the new crop will be lower than last year, in the whole world it is sufficient and trade flows will be slightly redistributed.”

Elena Faige Neroba Business Development Manager Maxi Grain

General export restrictions in the literal sense in trade practice do not happen often. Typically, such government actions are justified by a truly serious threat to food security. In this article, we will not consider the real threat of a pandemic declared in the world in terms of medical consequences. I confine myself to the fact that the measures taken have accelerated the slowdown in the global economy. Unemployment has risen sharply, many states are reviewing the budget and sending huge amounts of money both to special programs to combat the spread of the disease, and to support certain segments of the population, small and medium-sized businesses, and so on. There is no doubt that the global damage to the economy will be enormous, but now it is difficult to assess. Enterprises stop or cut production due to quarantine, and oil demand has fallen to such a scale that it has fallen to levels almost 30 years ago. This forced an increase in production in order to compensate for the profit in monetary terms. But the storage tanks quickly ran out, and the trend of cheaper prices intensified. On April 9-10, oil producers met and agreed to reduce production, but demand will not be restored at least until the end of quarantine.

Such situation with oil (and, accordingly, alternative fuel) has fallen off the grain and oilseeds market. Only wheat stood. The fact is that wheat is used for animal feed and the production of flour, but they do not make fuel from it. There are cheaper substitutes for this. All other crops, in addition to feed, are raw materials for ethanol or biodiesel, which means that their price correlates with oil. Cheap oil makes production unprofitable. Of course, a global trend with a small time lag affected the Black Sea corn.

At the same time, wheat was supported by information about the poor condition of crops in the Black Sea, namely, Ukraine and Romania, drought in Europe, as well as a significant reduction in areas in Ukraine, France, and the USA.

Part of the losses will be offset by good expectations in Russia, as well as high expectations for the harvest of Argentina and Australia, but today it is a trade of expectations. Potential problems with logistics and the approach of Ramadan pushed key buyers of the Black Sea grain to increase the pace of procurement in order to form the maximum reserves of raw materials for bread. This led to the fact that Russia and Ukraine, although they have sufficient reserves of wheat, announced the conditional figure of the export limit before the end of the season. Although analysts say these numbers are within expectations. Unexpected for the market was a complete ban on the export of wheat, including from Romania. A few weeks ago, local mills in private conversations complained that prices were very high and there was strong competition with exporters. The result was not long in coming.

The limits voiced by Ukraine and Russia, in fact, are fully consistent with the previously stated export expectations. Even at the time of signing the memorandum between the Ministry of Economy and exporters, after harvesting, Ukraine set a maximum annual limit of wheat exports of 20 MMT. Russia also took steps to voice the borders of grain exports, and the 7MMT figure “before the end of the trading year” was adjusted at the time of the announcement.

Kazakhstan, which accounts for a large part of the supply of wheat flour in the world, has stopped them, as well as the export of some other goods. Set quotas for the shipment of wheat.

Vietnam, the third largest rice exporter in the world, refused to supply it to overseas buyers, caring for its own food security. Serbia has banned the export of sunflower oil and other goods from the country.

The Chinese government, which traditionally produces and consumes a lot of rice, has announced a multiple increase in domestic purchases of this grain, despite the fact that grain stocks, including rice, in state funds are significant.

Other bans, in particular, on the export of cereals and some goods, do not have a significant impact on world trade.

Nervousness of the situation adds to the complexity of the logistics. Even before quarantine, strikes in France led sellers to fulfill contracts with grain of a different origin. Constant rumors of delays in the ports of Brazil and Argentina also excited the market. Today, all major world ports operate as normal. Some of them introduced a 14-day quarantine requirement for the crew, which makes boat freight more expensive.

The only thing positively influenced by the panic was the steps towards meeting between countries that were in protracted trade conflicts. In particular, China and Canada have moved off the ground in canola trade, and oil-producing countries quite quickly agree on previously unpopular measures.

The more the press discusses the message that there is a threat of a global food shortage in the coming weeks, the more pressure people put on their governments and the situation can turn into a snowball. Yes, stockpiling will temporarily affect exports and consumption by processors. But we are not talking about any “fragile situation that could soon call into question the existing consumption model”. Stocks will not be stored forever, which means that soon we will face a sharp collapse in exports and "eating up" of these stocks. Even if in some regions the new crop will be lower than last year, in the whole world it is sufficient and trade flows will be slightly redistributed.

At the same time, all these fears develop only due to lack of awareness and data distortion. Local currencies also have a sufficient impact. For example, the Russian ruble weakened during the “oil war” and exporters began to struggle with domestic processors before quarantine was announced in Russia. The high prices on the domestic market spurred the export quotations rust, rumors about an incomprehensible export restriction were overwhelmed by this and the rally began.

A good example is the situation with sunflower oil. Turkey actively purchased sunflower, but after a ban on its export was forced to switch to unrefined oil. At the same time, the seeds themselves are of no strategic interest, and the export ban was rather a response to a failed attempt to increase the export duty.

Thus, despite the global bearish trend, sunflower oil received support. Sometimes importers do not see the forest because of the bushes: blindly following some general trend, they do not try to find the cause of its occurrence. But you can play ahead of the curve.

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