“We feel that the global wheat market is substantially underestimating Black Sea war risks. The global wheat S&D is tight and still relies a lot on the Black Sea supplies. There is still a war going on in the region which doesn't seem to end anytime soon.  At the same time, we see record-high funds' wheat shorts position. Just imagine what would happen to that big short and the global prices if something bad happens in the region. It feels like we are sitting on a powder keg during the biggest war of the 21st century.”

Andrey Sizov

Managing Director 

SovEcon

February 24th marks the one-year anniversary of the Russian invasion of Ukraine. The ongoing war severely impacted the world grain supply and flows. With the war has enteredg its second year, the global grain markets continue to feel its ramifications. Since Russia’s invasion of Ukraine began, exports of grain from Ukraine have been significantly hit. The disruption in grain supplies pushed soaring prices even higher and contributed to a global food crisis. On 22 July 2022, an agreement was brokered by the United Nations and Türkiye to open a safe maritime corridor in the Black Sea and grain prices have dropped to the level they were before the war began. The deal, due to expire on Nov. 19, 2022, was extended for another 120 days. Now all eyes are on whether the deal will be extended once again in March.

We had interviewed Andrey Sizov, managing director of SovEcon, one of the leading agriculture consultancies in the Black Sea region, about the likely effects of the war right after Russia attacked Ukraine. The events of the last year showed that Sizov's predictions were correct. And on the first anniversary of the war, we once again consulted Mr. Sizov on the repercussions of the war on grain markets.

What does he recommend to grain-importing countries to avoid supply shocks? What are the scenarios for the Black Sea grain agreement? What risks await the global grain markets? In an interview with Miller Magazine, Andrey Sizov shares his views on these critical issues.

During our previous interview published right after Russia’s attack on Ukraine, you said that a prolonged war would push grain import bills further and you were right. Could you share your views on the effects of the war on the grain markets on the first anniversary of the conflict?

The wheat market was the one that was impacted the most. We've seen probably a record-fast rally at CBOT. The nearest contract jumped more than 70% in just three weeks. At that time it looked like the market was pricing in a full stop of Black Sea supplies.

The substantial short position of hedge funds also helped that rally. They were 37K contracts net short in mid-February and had to cover that urgently by buying wheat. I believe there were many margin calls during those weeks.

However, exports continued to flow from the region. After a temporary stop, Russia continued to ship wheat from its Black Sea terminals and Ukraine started to reroute its shipments via land and the Danube.

After the market realized that the Black Sea is still exporting it reversed sharply. Grain corridor which allowed Ukraine to increase its monthly shipment by more than two times helped bears a lot. It seems that President Erdogan, who was probably the key person behind the corridor, was very persuasive.

After all the sell-off now wheat prices are low than a year ago. We believe that if in 1H 2022 the market was overestimating Black Sea supply risks, now it's underestimating them.

 How the war has changed your life and SovEcon?

It is a big tragedy for me. It's a big tragedy for Ukraine and many people in Russia. I hope to see Ukraine free and peaceful. As per our team, we have been working remotely in different countries for several years already which helped us to adapt relatively fast.

HEDGING THE RISKS VIA DERIVATES

The war caused a supply shock in the grain markets. In this period, what lessons did the importing countries in need of Black Sea grain learn? What measures have been taken against such shocks? How has the war affected the world grain trade flows?

We are likely to see some countries depending on imports to try to boost domestic production. However, due to unfavorable climate conditions, such efforts won't bring any big achievements. The grain produced domestically will be more expensive compared to imports and will require a lot of taxpayers' money. Such programs are relatively easy to start but hard to end for political reasons.

Some countries could be importing less grain but end up buying more fertilizer, machinery, or other inputs to spend precious water reserves and grow $400 wheat vs $200 wheat somewhere in the Black Sea countries.

If I were a country with a large grain imports bill and would like to establish some kind of protection against price shocks, I would consider hedging my risks via derivates. Conceptually something similar to what Mexico does with its crude oil export revenue.

The Black Sea grain deal should be extended in March. But there is ongoing uncertainty about this hot topic. How would you evaluate the possibility of renewing the agreement? Is it possible to extend the scope of the agreement? Under what conditions would Russia give the green light to extend the deal?

As of today, February 28, we believe that the chance of the extension is 90%+ unless there is a feud between Ankara and Moscow. I doubt that the deal terms will be changed

How has the conflict affected grain plantings in Ukraine?

Ukraine cut the winter wheat area to 3.8 mln ha from 6.3 mln ha due to the war, as per AgMin. However, we believe the final area number will be at 4.1 mln ha. The new wheat crop is currently estimated at 18.2 mmt vs 20.4 mmt in 2022.

UKRAINIAN FARMERS SHOWED RESILIENCE IN 2022

Ukrainian agricultural fields and equipment have been damaged in the war. Farmers had to leave their land. Producers suffered financial losses. How will the shortage in Ukrainian grain supply affect grain markets in the medium term?

I think that the 2022/23 Ukrainian crop and export problems have been priced in already. The Ukrainian wheat and corn export program is done by around 80% and will be done by 100% even without the grain corridor extension.

2023/24 will depend a lot on the course of the war. For example, a likely Ukrainian counteroffensive in southeast could have a direct impact on the country's new wheat crop. Wheat is mainly grown in the south of the country. If Russia decided to move to try to move its troops in the northern-eastern regions that could impact the seeding of late spring crops like corn and sunflower. Will we see some truce in 2023? There are many scenarios.

I won't overestimate the impact of the war on Ukrainian agriculture. When the war is over and if it doesn't take years, I think the sector could recover relatively fast. In 2022 Ukrainian farmers showed resiliency when they harvested a relatively good crop during the full-scale war. Imagine what they can do when there is peace.

OUTLOOK FOR THE RUSSIAN WHEAT HARVEST AND EXPORTS

Russia's wheat export pace is increasing. Could you share your predictions about the wheat export of Russia?

Our current estimate of Russian wheat export is a record-high 44.2 mmt vs 33.4 mmt in 21/22. Shipments are fast indeed at the moment but they can't offset the slow start of 2022/23 export campaign.

How sanctions have affected Russian grain exports?

It's more pricey to deal with Russia because of longer compliance, and issues with payments and insurance. However, the main problems for Russian grain exports this season is the strong ruble in 2H 2022 and the strict export tax. In 1H 2023 Russian wheat is highly competitive again, stocks are record-high but the country can't increase shipments because of infrastructure bottlenecks. Somewhat it's similar to Australia where part of their new record-high wheat crop will be trapped inside the country as ports can't handle it all.

 Can you share your initial projections for the 2023-24 Russian wheat harvest?

 Currently it's 85.3 mmt vs 104.4 mmt in 2022. We lowered the estimate a bit recently amid dryness in Russian South, a key wheat region. However, right now it's getting some very timely rains just ahead of the vegetation starts.

 What will be the key factors -other than the war in Ukraine- affecting the grain prices in the coming months?

We feel that the global wheat market is substantially underestimating Black Sea war risks. The global wheat S&D is tight and still relies a lot on the Black Sea supplies. There is still a war going on in the region which doesn't seem to end anytime soon.

At the same time, we see record-high funds' wheat shorts position. Just imagine what would happen to that big short and the global prices if something bad happens in the region. It feels like we are sitting on a powder keg during the biggest war of the 21st century.