Wheat hedgers wear shorts. This is the biggest shorts since May 2019. Number of short contracts, while corn and soy are in long, tells us that the market is preparing for big numbers announcements…You need to remember one thing: when you wear shorts, it is important not to burn.
With Russia’s invasion of Ukraine, the global economy suffered consequences — the grain trade suffered, as both Russia and Ukraine are major players in the wheat market. In particular, the globe is still attempting to recover from the effects of COVID-19. And food supply is still on the table.
Wheat hedgers wear shorts. This is the biggest shorts since May 2019. Number of short contracts, while corn and soy are in long, tells us that the market is preparing for big numbers announcements. It’s clear that Russia will end the season sitting on huge stocks and India is trying to avoid imports, waiting for the new crop.
According to U.S. Wheat Associates, market sentiment has become increasingly bearish and prices have significantly dipped in the buyer’s favor; however, many unknowns linger in the market. Will the underlying uncertainty of Putin’s war continue to support the market? In more recent news, on Jan. 25 a Russian missile struck a Turkish cargo ship in the port of Kherson in Ukraine, also sending futures momentarily higher. Volatility is a concern for as long as the war continues. Global balance sheets will also remain tight into the new crop year, and global wheat consumption continues to outpace production. Another factor, though not unique to this year, the weather will continue to play a significant role in prices as markets closely monitor the drought-afflicted Argentine wheat crop and HRW conditions in the U.S. Central and Southern Plains. Wheat dips to its lowest since 2021 on good weather and big acreage across the globe, except the Black Sea. US snowfall may protect against the upcoming cold. Euronext wheat futures downstep to a long-time low, as a firm euro and competition from the Black Sea region again weighed on prices.
As of January 1, 2023, wheat stocks in agricultural organizations of Russia amounted to 22.1 million tons, according to Rosstat. This year’s indicators are 42% higher than the average for the last five years partly because of slower compared to available wheat exports pace, partly because of the War which Russia launched against Ukraine. Rosstat’s data do not represent all market participants, but clearly show us the total volume of supply in the country.
For July-December 2022, exporters sold 22.7 million tons against 23.0 million tons on average over the past five years. Same time official Kremlin’s crop figure is over 100 million tons – 37% over YoY. Part of this grain is stolen from occupied Ukrainian farmers. The slow export caused by the strengthening of the ruble, high freight rates and the impact of export duties – the Russian government is looking for the money to pay for weapons from their partners wherever they can. The largest wheat reserves - 55% higher YoY - are located in the South, the key export region of Russia. This means exports are slow but stocks create pressure on global prices. Looks like Russian traders are ready to sell grain for free in the nearest future.
India is set to harvest a record wheat crop this season as favorable climate and heat-resistant seeds are expected to boost yields, potentially setting the stage for the country to lift restrictions on exports and let some amount of questionable-quality grain flow to neighborhood countries. Production may climb almost 5% YoY to 112 million tons starting in May. Farmers planted 82 million acres across India this season, an increase of 0.7% from the previous season, according to the farm ministry. Wheat, planted in October 2022, accounts for about 65% of India’s winter-sown food grains. The previous official all-time high was 109.6 million in 2020-21 while some Indian experts are much lower. A bumper crop may allow the government to lift export restrictions and help cool domestic prices. Indian population is the world’s biggest one as of today and many people can’t substitute wheat by rice. India partly halted wheat exports in May to prevent food shortages and inflation amid the war in Ukraine. The decision was taken after a record-breaking heat wave cut the crop. The production outlook is brighter this season as planting area has expanded, many farmers have sown new varieties that can withstand higher temperatures and the weather has been favorable so far, mention Indian experts.
Reuters mentioned that wheat prices in India, the world’s biggest consumer of the grain after China, have dropped nearly 13% from record highs since the government offer last week of 3 million tonnes to bulk consumers such as flour millers. Prime Minister Narendra Modi’s government on Wednesday allowed flour millers to buy up to 3 million tonnes of wheat from state reserves. These days, wheat prices in New Delhi dropped to 28,290 rupees ($347.11) a tonne, down 13% from their record high hit last week because stocks are low. Anyway, prices are still high.
If you shout “wolf” for a long time, sooner or later they will stop believing you, even if the wolf exists and it is necessary to be afraid of it. The grain corridor from Ukraine is nominally working and the extension of its functioning is a solved question that lies in the plane of politics. But does he really care? How many vessels on average now pass through the grain corridor? What is the average monthly volume now? The answers are disappointing: 2-3 vessels per day - almost the same as at the beginning of work in August 2022, when the market was not sure whether the Russians would comply with the agreement at all. This is categorically not enough - in September and October, the indicator was twice as high. When the Russians realized this, they began, under various pretexts, not to inspect the cargo. In order to ease the situation a little, the traders took quite unusual steps for Ukraine - they agreed to load as many vessels as possible to increase the total cargo with such a number of inspections, but this still did not increase exports to the required level.
In just 6 full months of the Initiative’s work, Ukraine delivered 19 million tons of products to the world through the Corridor - that is, an average of 3.17 million tons per month. Taking into account the capacity of the ports of Greater Odessa - about 6 million tons per month - we could during this time export up to 36 million tons. The difference is only half a year - up to 17 million tons. This is, for example, almost 3 annual needs of Nigeria for imported wheat or 24 years of imports maize by Kenya.
“Thanks” to the Russians, Joint Coordination Center Inspection works by a third of the possibilities. Teams do not work full-time. Not every day. Inefficient. Drives are pulled by the ears. This is a kind of “Italian strike”. According to the Ministry of Infrastructure of Ukraine, as soon as the volume of exports began to grow - in October - the Russian side reduced the number of inspection teams from 5 to 3 without any explanation. Secondly, they artificially increase the time for conducting the inspections themselves by checking the performance indicators of the vessels, which are not regulated by the JCC documents and have nothing to do with the grain agreement. Thus, it takes from 4 hours to inspect one vessel, and 5-7 entrance and exit inspections take place per day, with a minimum of 16-18 required. There are rare cases when Russians simply refuse to work for fictitious reasons when all other parties in the SCC confirm the conditions for continuing the inspection.
As of January 30, 117 vessels were awaiting JCC inspection in the Bosphorus (25 with agricultural products on board, 92 vessels going to ports for loading). The data on inspections of loaded vessels and the figures every day +- are the same for the last few months. The average waiting time is from 2 to 5 weeks, which also leads to millions of losses for cargo owners.
The problem could be solved by increasing inspection groups and the number of inspections per day. Ukraine has repeatedly appealed to our partners under the agreement and they are ready for this. In November, when more than 200 vessels were expected in the Bosphorus, and Russia “suspended” its participation in the agreement outside the terms of the agreement, the UN and Turkey independently conducted 86 inspections in two days and proved that this is quite possible. This was confirmed in the JCC. Although there were no corridors before the war, everyone traded freely.
The grain market is flexible and trusts to arbitrage all conditions, including new insurance. In fact, the Shipowners’ Club, excluded military risk coverage for one type of insurance from its policies for Ukrainian waters. However, this is not the only way to get such a policy.
We note that since January 1, 2023 (the date from which the Club ceased to cover military risks in policies), as of January 29, 76 vessels have left, that is, traders sign policies with insurance companies directly. But this is nothing compared to September or October when more than twice as many bulkers and tankers left, and the problem is precisely the low pace of inspections in the Bosphorus. So the market is not sensitive to Corridor issue anymore – it is what it is.
You need to remember one thing: when you wear shorts, it is important not to burn.