Andrey Sizov
Managing Director of SovEcon

Interview: Namık Kemal Parlak

Andrey Sizov, Managing Director of SovEcon, provided comprehensive insights into the current state of the global wheat market during an exclusive interview with Miller Magazine. Sizov addressed key factors impacting Black Sea wheat production and exports, global price movements, geopolitical tensions, and grain trade dynamics.

Andrey Sizov analyzed the decline in global wheat prices since May 2022, citing managed money and short-selling strategies as significant factors. He highlighted the disconnect between prices and fundamental indicators like global stocks-to-use ratios, indicating potential undervaluation in the market. Additionally, Sizov noted positive price movements in Matif wheat, signaling a shift in trading dynamics.

Sizov identified various factors that could influence wheat markets, including weather conditions, production outlooks in key regions like the Black Sea, EU and North America, and geopolitical risks in the Black Sea region. He highlighted the ongoing conflict’s potential for disrupting grain shipments and emphasized the need for vigilance despite perceived low risks.

Addressing the slowdown in Ukrainian grain exports, Sizov emphasized reduced grain supply as the primary reason, rather than direct attacks on Ukrainian ports. He highlighted the depletion of stocks and the potential for a significant decline in exports in the short term.

He discussed the EU’s imposition of tariffs on grain imports from Russia, characterizing it as a political gesture rather than a practical measure. He addressed the impact of the Red Sea crisis on grain exports as well, noting a decline in shipments but downplaying its significance in the current market context.

SovEcon has raised its 2024 Russian wheat production estimate to 94 million tons. Despite the optimistic outlook, you have also raised concerns about recent weather conditions in key wheat-growing regions. What specific challenges do these weather patterns pose for wheat production, and how might they affect crop yields?

Yes, we have indeed increased our forecast. The main factor driving this adjustment was the consistently favorable weather conditions experienced throughout most of the winter. It was yet another mild winter for Russia, with minimal risk of winter kill. We didn’t encounter any extreme cold temperatures or the formation of ice crust, which can often pose significant challenges to plant growth and survival. As a result, we found ourselves revising our forecasts upwards over the past few months, as the outlook continued to improve steadily. As we progress into late March, the overall condition of crops remains promising, prompting us to revise our estimates once again.

However, it appears that the weather pattern is now beginning to shift. Key wheat-growing regions have experienced a period without significant rainfall, which is concerning as the plants now require moisture. The southern regions, in particular, play a crucial role in wheat production in Russia, and the forecast indicates continued dry conditions. Therefore, if we do not see rains within the next two to three weeks, it could potentially impact the yield potential in the southern region.

It’s important to note that this concern primarily applies to the southern regions at this stage. Other regions have recently shed their snow cover, and vegetation is just beginning to emerge. These areas have received sufficient precipitation due to snowfall. Thus, the focus of concern currently lies mainly in the south. While it’s not a significant issue yet, it could develop into a problem if the region doesn’t receive adequate rainfall within the specified timeframe.

Can you also share your forecast for the Russian wheat exports for the new season?

Our initial estimate for Russian wheat exports was 50.4 million tons, which is nearly on par with the record level seen in the previous year. And we revised this estimate to 49.8 million tons for the current season. There’s potential for this figure to edge even higher if regulatory conditions permit. The presence of historically high carryover stocks from the current season, which concludes in June, coupled with another robust crop estimated at 94 million tons, indicates a substantial wheat supply in Russia. Consequently, this abundance is likely to translate into elevated export volumes once again.

PERSPECTIVES ON WHEAT PRICE TREND

We’ve seen a significant decline in global wheat prices since the start of 2024, with prices now reaching pre-war levels. What factors do you attribute to this price movement, and do you expect this trend to continue?

Global wheat prices began falling in May 2022 and have continued to decline since then, with a recent pause in the downward trend. Currently, prices are even below their pre-war levels. However, fundamentally they should be somewhat higher. Global stocks to use ratio has been increasing in recent few years but still remains historically low.

Our model shows that the average price for this season should be around $250 per ton for Black Sea wheat even with 0 disruption risk which is not the case. At current prices, average prices for this season are below that level. Why are we here? I believe the main factor remains the same: The funds have been making money by selling SRW wheat since May 2022. They have remained consistently short, continuously selling wheat, making money on new lows and negative yield rolls.

Interestingly, in recent months we have seen a very different story in Matif wheat. After hitting a record-high short of 170K contracts in January the funds have started to buy back the contracts aggressively which converted into a rally in French wheat and also supported Black Sea values.

Looking ahead to the new season, there are several variables and uncertainties that could potentially support wheat markets. While the outlook for Russia appears favorable, as we’ve already talked recent dry conditions raise concerns that circumstances may change in the coming months. The EU is sitting on relatively high stocks. However, the production outlook is not that great, especially for France, the number one wheat grower and exporter in the EU. Their crops are in bad shape. In North America, the dryness affecting spring wheat in Canada and the U.S. poses additional risks. These uncertainties contribute to the growing likelihood that markets may have reached their bottom.

Another issue to consider is the risks and disruptions in the Black Sea region. Russia and Ukraine constantly attack each other with missiles and drones. Ukrainian electrical infrastructure and Russia’s oil refining plants seem to be the main targets now but things could change and we could see more attacks impacting grain flows from the countries.

EU TARIFFS ON RUSSIAN GRAIN INSIGNIFICANT IN TRADE DYNAMICS

With the EU Commission implementing tariffs on grain imports from Russia, how do you expect this move to influence trade dynamics?

It’s just a mostly negligible fact both for Russia and for the EU. It all started because of farmers protests in the EU. I don’t remember anyone talking about grain from Russia, with the exception of the Baltic states. If we talk about EU wheat imports from Russia, it’s just around 200,000 tonnes, which is negligible compared to Russia’s annual export of 50 million tons. So it’s basically nothing. The primary grievances of EU farmers revolved around bureaucratic hurdles, regulations, declining prices, competition from Ukrainian supplies, and concerns about the impending free trade agreement with South America. These were their main demands. 

But for political reasons, the EU can’t block grain supplies from Ukraine. They again extended those tax-free supplies from Ukraine, so Ukraine will be able to ship its grain, though with some additional quotas.

I think EU leaders thought, “Let’s do something to at least calm down the farmers,” and decided to ban supplies from Russia. It doesn’t make a lot of practical sense. And I really doubt that farmers are happy because they understand that it’s negligible volume. So it’s basically not important for Russia and not important for the EU. It’s just a political, not a good attempt to please European farmers. And I don’t think EU farmers will buy it.

Reports indicate that major Russian grain exporter RIF Trading House is facing significant challenges, including forced asset sales and port blockades. What are the potential implications of these developments on Russian grain exports and global market dynamics?

This news is very unfortunate for RIF Trading House itself. However, in terms of the broader impact on global Russian exports, regardless of what happens to RIF, I don’t think it will have a substantial impact on total exports.

UKRAINIAN GRAIN EXPORT SLOWDOWN DUE TO SUPPLY CONSTRAINTS

Constant attacks on Ukrainian Black Sea ports by Russian forces have led to a slowdown in maritime agricultural exports. How resilient is the Black Sea shipping network in the face of ongoing conflict, and what are the potential consequences for global grain trade? How resilient is Ukraine’s unilateral humanitarian corridor?

The main reason is not the attacks but rather the reduced grain supply. Ukraine had a smaller crop last year and smaller carry-in stocks ort his season compared to previous ones. After the record-high crop of 2021, the surplus stocks were shipped to the EU and other destinations. Currently, the stocks are nearing depletion, leading to lower exports. March shipments dropped 10% month on month and we expect to see a faster decline in exports during the rest of the season.

Russian attacks have not yet been sufficient to deter vessel owners from operating in the region. Trade is still ongoing. For instance, heavy attacks on the Danube terminals in the past did not disrupt operations. Although attacks are now more frequent, vessels are still loading and unloading grain. Therefore, I don’t consider it a major issue for Ukrainian grain exports at the moment. It’s possible that if the Kremlin were determined to disrupt shipments, it could do so. However, the damage caused by drone and missile attacks since the collapse of the Grain Deal last summer and Ukraine’s independent shipments through the humanitarian corridor has been minimal. Some infrastructure has been damaged lightly and there was only one case when a ship in Odesa terminals was hit.

The EU is extending tax-free regimes for Ukrainian grain exports. However, farmers in the EU are protesting against cheap grain imports from Ukraine. How do you assess the impact of this situation on EU grain markets?

Yes, as expected, the EU extended the tax-free regime for Ukraine for another year. However, they added some caps, and it seems that these caps will be stricter than initially expected. This is because they will use a longer period of time as references for the quotas, including pre-war levels in 2021 when supplies from Ukraine were low. Consequently, the average will be lower. Farmers in the EU are not happy due to various factors, including low prices, Brussels regulations, and the EU Green Deal, which implies increased costs for farmers. However, the problem with low prices in the EU is not due to Ukraine supplies but mainly because prices are low everywhere. Even if Ukrainian imports were fully blocked, it would only marginally increase EU prices, perhaps by around 5%.

Currently, EU authorities are attempting to appease farmers, with Eastern European countries receiving substantial subsidies from Brussels. They have also granted numerous exclusions to these countries. For instance, grain can only be transported through the country but cannot be sold there. Despite these efforts, farmers continue to protest, primarily as a political issue. They hope to extract more concessions from their governments, particularly in Eastern European countries like Poland, which have received subsidies. Brussels’ response to this situation has highlighted its weakness, as it did not punish individual countries for blocking Ukrainian exports without a common EU decision. Instead, these countries received subsidies from Brussels.

It seems that things should settle down shortly. However, I think sooner or later we will see farmer protests in the bloc again. This cycle will likely continue until the EU substantially deregulates its market, reducing reliance on government support and allowing farmers more autonomy in decision-making.

There seems to be some confusion about the China-Russia wheat trade. Has Russia gotten the green light from China for wheat exports or not? Why might Beijing be cautious in approving Russian wheat exports to China? What are the prospects for Russian wheat in the Chinese market?

Currently, the volumes are negligible, mainly shipped by rail from Siberia. In February 2022, China approved Russia’s supply of wheat, but only as spring wheat Meeting these demands requires separate storage and handling facilities, which is impractical for Russia. Additionally, Russian exports primarily consist of winter wheat, accounting for 80%-90% of total exports.

One possible reason for this situation could be political. China tends to act swiftly when it has a need, as seen in its diversification of corn suppliers following the trade war initiated by Donald Trump. They started to buy corn from Ukraine at that time. A couple of years ago, they also quickly ramped up their corn trade with Brazil, making Brazil the number one supplier of corn to China.

However, in the wheat market, China appears more confident, with suppliers from the EU, the U.S., and Australia. They also added Argentina to the list recently.

If Russia can offer something in exchange, China might consider it. However, I suspect that China doesn’t have a significant need for Russia as a wheat supplier, which may be why they haven’t approved it. Perhaps things could change this May when President Putin is to visit Beijing.

Until recently, the Red Sea crisis was in the headlines. But not so much now. How is the flow of grain through the Suez Canal? How has the Red Sea crisis affected Black Sea grain exports?

We observed a substantial decline starting at the end of 2023. However, it has more or less stabilized since then. I believe it has slightly impacted the supply of grain from the Black Sea and Europe to Asia where it became more expensive because of higher freight and somewhat helped Australia’s exports.

The restricted navigation in the Suez at this stage has a limited direct impact on grain market dynamics. However, it makes sense to keep a close eye on the region. The conflict which is not involving Houthis only is far from over. Just this week, there was an attack on the Iranian embassy in Syria and the crude prices are rallying.

A war in the region could shake all markets including grain. Bear in mind that in any serious risk-off scenario could be extremely bullish for wheat and corn short-term as the funds will have to cover their shorts.

Last question, what are the other key grain market drivers that stakeholders should monitor going forward?

Obviously, the weather outlook for the northern hemisphere is a significant factor, particularly as we enter the months of April and May. These months can be quite volatile due to weather-related factors. Additionally, the war in the Black Sea region remains an important story to monitor. Tensions in the Middle East are far from over. 

China’s economic health is also another important topic. Despite all the gloomy headlines the second world economy is likely to perform well in 2024 implying robust commodities demand. Perhaps it’s one of the reasons that broad commodities indexes have been rising in recent months.

Almost everything is getting more expensive – metals, softs, energy, and grains are an exception. Typically such divergence doesn’t last for long.