Natalja Skuratovic Senior Manager Sales CIS PETKUS Technologie

COVID-19 brought about disruption to the global economy and world trade. As a result, production and consumption are scaled back across the globe. Does the proverbial tightening of purse strings translate to the same extent in grain markets? During a teleconference on 22 September, a group of Rabobank analysts from around the world identified seven areas of major, long-term change for the grain sector due to the pandemic of COVID-19 which are listed in the chart below: Whereas some changes are yet to be assessed, others are at the order of the day and their influence cannot be underestimated. Among them: 1) increased government intervention; 2) changes in consumer behaviour; 3) increased food security concerns. Following most basic human instincts, consumers tend to resort to hoarding in the uncertain times of the pandemic, which may cause shortages. This year we have witnessed grain importing countries stepping in to counter panic-buying, protect local consumers and to guarantee the continuity of supply by building up inventories in order to keep at bay food security concerns caused by the pandemic of COVID-19. For their part, the governments of the producing countries have either pondered or, ultimately, resorted to export restrictive measures in order to limit price increase of the basic food commodities in their respective countries. The latest and most troublesome for the grain markets as they entered traditionally quiet - in terms of news and price swings - festive season, is the pending imposition of the Russian export quota and tax. Announced measures, in Russian Prime Minister’s words, are to curb “food price inflation” following a spike in food inflation in Russia (5.8% in November 2020). These grain export restrictive measures hang over the market like the sword of Damocles, making the Russian availability in the export markets more of an unknown. It’s the unknown that is currently driving the markets given the uncontested leadership of Russia on the world wheat export market. It can be either feared and shrouded in darkness or embraced while trying to navigate what is going to happen next. As a matter of fact, Russia has a history of disrupting the wheat market by implementing restrictions or duties. The difference is that today Russia has come to lead global exports in wheat. Official Russian crop numbers have been made public at the end of December. According to Russian Federal Statistic Service Rosstat, Russia harvested a grand 85.9 million tons of wheat. However, what’s important to know at this point, are the actual Russian wheat exports and their timing. Up until recently, most analysts pegged Russian exports close to 40 million tons. However, in the light of today’s situation, this number is being questioned. Thus, Russian agricultural markets consultancy SovEcon in their report dated 28 December, slashed its wheat export estimate from 40,8 million tons in November to 36,3 million tons betting on farmers to postpone the sales. Source: Van Trump Report (based on USDA data) Speculations as to the consequences of the implementation of restrictive export measures by Russia give rise to rumours. Consequently, as the infamous trading saying says: buy the rumour, sell the fact. As of late, we have seen a flurry of pre-holiday buying spree: Egypt, Tunisia, Bangladesh, Thailand, Yemen - all tendering to buy wheat. Private importers have also been busy. This comes on top of robust grain demand from China. In the meantime, prior to the enforcement of the announced export tax as from February 15, 2021, Russian customs authorities have started checking export shipments (a procedure which might take up to 10 days!) and, thus, slowing down exports. Delays in obtaining phytosanitary certificates are now forcing grain trading companies to wait effectively 3 to 5 days, inflicting demurrage costs on the shippers. Logistics in Russian ports in the winter is usually no picnic. This year it is no different. There is currently a severe shortage of river-sea type fleet on the Azov freight market. During a recent period of adverse weather conditions limiting navigation in the Azov region, a large number of unshipped parcels have accumulated, adding easily 2 USD/ton to the for voyages with lay/can in December. How does it all reflect on wheat prices today?

1. Building pressure on the Russian FOB prices spot positions.
2. Building pressure on Russian CPT prices with limited farmer selling (for the moment, at least).
3. Imminent spike in all CIF prices.

Uncertainty around Russian wheat export policy for the moment put other origins in the driving seat, making them sell like hotcakes. It is the Romanian and the Ukrainian origins that dominated at the last GASC tender. However, markets are concerned with supplies running low due to the fact that the Romanian wheat crop is down 40% this season compared to last, and Ukrainian wheat crop is also down by about 10% this year. Australian wheat is also in high demand. While it is in ample supply this season, Aussie wheat is logistically strained with exports committed through end of March/early April 2021. In parallel, at the time, when historically Argie wheat comes into play to make things more interesting and competition fiercer, more than 100 vessels are wating to be loaded at Argentinean ports due to ongoing port strike, making Brazilian millers very nervous. EU is the cheapest origin to many destinations Feb onwards making it hard to ration the demand in view of what is starting to look like critical carryover stocks following last season’s poor crop. It is fundamentals, such as supply chain glitches paired with robust demand, which drive up the heat in the grain markets. And technical/algorithmic driving forces of trading take it over from there. Christmas and New Year season is usually marked by less participants. This year it does not equal lacklustre trading. US soft wheat futures became increasingly volatile with a wide trading range of up to 20 cents in the sessions preceding Christmas holidays. Wheat related news in the past week has also spiked prices in global markets. At the same time, underlying strength in corn and beans underpins the world wheat values keeping a solid floor. Grain futures and options contracts are no longer primarily used by farmers, traders and processors to hedge their risks. Their practical use of a hedging instrument for offsetting the positions in the physical market has been dwarfed by huge positions of speculative financial entities, who now dominate in commodity contract transactions. We now have a situation, where the interconnectedness of the financial and agricultural markets is uncontested and pervasive. Agricultural contracts are bundled with non-agricultural contracts into commodity index funds contracts. It is the fund formula, rather than supply and demand fundamentals, that drive prices. Funds trade on the basis of algorithms and specialize in managing price shocks and volatility to their own and their client’s benefit. News of trading restrictions are not easily quantifiable. When data analysts, however, figure out how to quantify any given news (i.e., in case of a steep drop in projected Russian exports due to the introduction of quota/tax, etc.) and feed those numbers into the formulae, algos will take over from there with vengeance. 'Tis the season to be jolly, and Russian agricultural producers are traditionally gone until mid-January. Increased financial stability of Russian farmers due to record prices of the last season, have enabled them to build their storage capacities. It is doubtful as to whether there will be many traders willing to sell the wheat ahead of Russian farmers’ return to the market, not knowing what prices farmers will be willing to accept when they are back in the game. Postponed sales may prove bearish in the long-term in the absence of other bullish news (adverse weather and the like). A well-known Latin proverb teaches us that Fortuna Eruditis Favet ("fortune favours the prepared mind"). It is up to the market players to turn this current supply crunch into a historic opportunity, that will allow them to generate significant economic benefits from what looks today like ill-defined markets.