Valerii Liulchenko Christina Serebriakova
Broker & Co-Founder Broker and Head of Analytical Department
Atria Brokers Atria Brokers
Such a statement is highly connected with the fact that this season most of Ukrainian wheat is feed quality or in the best case has 10.5% protein. Historically, such quality Ukraine supplied to Asian markets during the first part of the marketing year. These markets require the execution of contracts with panamax-size vessels. It was impossible after Russia left the grain deal and till September 2023, when the new Ukrainian grain corridor started its work. Quite symbolically, the first vessel Resilient Africa, which was loaded at the POC ports (Pivdenny, Odesa, Chornomorsk) was carrying feed wheat cargo. Further, we will analyze the prospects of Ukrainian wheat on the world market this season.
Ukrainian wheat export share on world market will fall to 5% vs 9-11% pre-war level
Ukrainian AgMin estimated 2023 wheat crop at 22.2 MMT, +16% y/y. At the same time, estimation by the USDA differs, with the 2023 crop pegged at 22.5 MMT, up 5% y/y. The Ukrainian Grain Association (UGA) estimated 2023 production at 22 MMT, up 9% y/y. The increase in the harvest is due to favorable weather conditions and better-than-expected crop yield that allowed to obtain crop much higher than it was initially forecast (16.5 MMT by the USDA).
Despite higher crop harvested this season, export forecasts are about smaller shipments of Ukrainian wheat in 2023/24 MY. In October, the USDA reported the export potential at only 11 MMT, marking a 36% year-on-year decrease. It means that the share of Ukraine in the global wheat trade to decrease to 5% vs 8% in 2022/23 MY, and vs. 9-11% of pre-war levels. The UGA is more optimistic with export seen at 16 MMT, -5% y/y. This figure is based on the carry-over stocks amounted to 4.4 MMT. Moreover, the UGA emphasizes that such export volumes can only be achieved if Ukraine is able to export through its Black Sea ports and if the logistics of alternative routes, including the Danube route, are improved and cheaper. But these two moments are questionable.
The key question is the capacity of the new temporary grain corridor allowing shipment of grain via deep-sea ports of Ukraine that was launched on 17 August, in a month after Russia halted the original grain deal. At the very beginning, the corridor was used to let the ships stuck in Ukrainian ports since February 2022 to leave. After they managed to pass this new route safely, new vessels started to arrive in Ukraine for loading with grain and other products. The first vessels arrived at the ports on 17 September. After the first vessel went out through the corridor on 19 September 2023, the export from the POC ports is gaining momentum and all eyes are on its potential. This route is essential for the supply of Ukrainian wheat to Asian buyers, which will have higher demand in 2023/24 MY, at a time when key competitors here – Canada and Australia – will have smaller production volumes. At the same time, competition from Russia and the EU will strengthen in 2023/24 MY, as both will have bigger export potential. It will challenge Ukraine in the markets of North Africa and Turkey.
KEY DESTINATIONS OF UKRAINIAN WHEAT
Constanta remains a window for Ukrainian wheat to the world market
The wheat trade matrix (Table 1) shows that the shipments of Ukrainian wheat in Jul-Sep 2023/24 MY amounted to 3.3 MMT, up from 3 MMT over the same period last season. The EU is the key destination for Ukrainian wheat, with almost 2.3 MMT supplied to the bloc, up from 1.5 MMT in Jul-Sep 2022/23 MY. It is mainly because of re-export to other buyers via the Romanian port of Constanta (about 40% of Ukrainian wheat export to the EU) and also due to good demand for feed and 10.5% protein wheat from Spain and Italy. Spain suffered from a prolonged drought this season that forced the country to look for large volumes of imported wheat.
In 2023/24, Partial Loss of Middle East Market as Turkey Imports Drop 17%
The specific of Middle Eastern countries is that they traditionally prefer 11.5% wheat. The deliveries to Turkey plunged to only 159 KMT over the first quarter of the season, down sharply from 768 KMT the year ago. Bigger own production, 130% import duty for wheat and strong competition from Russia cut the demand for Ukrainian wheat on the Turkish market. The USDA sees Turkey’s wheat import at 10 MMT in 2023/24 MY, down 17% y/y. Smaller purchases will be based on 13% increase in production volume – to 19.5 MMT. Also, Turkey has massive carry-in stocks this season that amounted to 4.1 MMT, up 86% y/y. A larger domestic supply will limit the demand from the key buyer of Ukrainian wheat. Moreover, Ukrainian exporters have to deal with strong competition from cheap and better-quality Russian origin in the Turkish market. Thus, Russia managed to export almost 1 MMT of wheat to Turkey in the first two months of the season (Jul-Aug), up slightly from 926 KMT a year ago.
North Africa: All eyes on Egypt, expected to import 12 MMT of wheat
Egypt may raise the foreign purchases of wheat for the first time in 3 years. The USDA forecasts Egypt’s import at 12 MMT in 2023/24 MY, up 7% y/y. The growing population combined with lower output at 8.9 MMT (-6%) and smaller beginning stocks at 4.6 MMT (-13%) will push Egypt to purchase more wheat abroad. However, it is difficult for Ukrainian wheat to stay competitive in the Egyptian market, as it is hard to beat cheaper Russian origin. EU countries also try to have their share of this pie. High freight is making Ukrainian wheat less attractive to Egyptian buyers. Despite this, we see bigger Ukrainian wheat deliveries to Egypt at 454 KMT in Jul-Sep 2023/24 MY, up from 135 KMT over the same period last season. There is also strong competition from Russia, which shipped 925 KMT of wheat to Egypt in July-Aug, up from 852 KMT. At the same time, the shipments of EU wheat decreased to 126 KMT in July-Aug from 536 KMT. Russia will remain the key competitor for Ukraine in the Egyptian market, while the EU will also do its best to fight for this buyer.
Ukrainian wheat export to Asia depends on competition with corn
There was no sizable export of Ukrainian wheat to Asia in Jul-Sep 2023/24 MY, as the corridor was virtually absent during this period. The only moment to see is 71 KMT of wheat shipped via containers to Indonesia vs. only 5 KMT over Jul-Sep 2022/23 MY. Traditionally, July-September were pivotal months for Ukrainian wheat exports to Asia. This time is lost, but we still have October-December to catch up. Herewith, competition for the POC ports will be fierce from the side of the Ukrainian corn market.
As the new grain corridor is gaining momentum in Ukraine, the demand for Ukrainian wheat from Asian consumers is growing. Moreover, the forecasts of imports for the key Asian buyers are for higher purchases in 2023/24 MY. Particularly, the USDA sees wheat import to Indonesia at 10 MMT, up 5% y/y, to Bangladesh at 5.8 MMT, up 14%, and to the Philippines at 6.1 MMT, up 7%. Australia and Canada are key competitors in the Asian market for Ukraine, but smaller crops in these countries this season may give a chance to Ukraine. Strong demand for Australian wheat from China may leave other Asian buyers undersupplied.
COMPETITION
Russia may cover nearly a quarter of global wheat export
Based on the October WASDE report, we see that the share of Russia in the world wheat export will increase by 3% y/y to 24% in 2023/24 MY. The USDA’s initial figure for Russian 2023/24 wheat export was at 45.5 MMT, then it was upped every month and reached 50 MMT in October’s report which will be a new record. The shipments will increase by 5% y/y.
Despite such strong export prospects, local Russian analysts consider the state regulations – unofficial floor export price – harmful to trade potential. For October, they expect the shipments to fall below last year’s and last month’s results. Particularly, SovEcon sees October wheat export at 3.9-4.4 MMT, down from 4.5 MMT last year and 5 MMT in September.
The market does not have a clear understanding of how this unofficial floor price works. According to Reuters sources, the ministry’s informal minimum export price requirement is $270/MT FOB for tenders and $260/MT FOB outside tenders. Traders said there are different minimum prices for sales for different months and protein wheat grades. One trader said that the price floor for November was thought to be set at $270/MT FOB.
We have already seen that the floor price made Russian origin uncompetitive at Egypt’s tenders on 20 September and 27 September, when the EU origins won. However, on 12 October, Russian wheat came at $260/MT and $265/MT FOB depending on payment terms. It helped Russia to sell GASC 300 KMT out of a total of 470 KMT booked. Moreover, GASC is believed to have bought 480 KMT of Russian wheat in a private deal on 10 October, with traders estimating the price at about $265/MT FOB.
As to the production of wheat, the USDA pegged it at 85 MMT in 2023, down 8% y/y. However, the official harvesting statistics show 92.5 MMT already in bins as of 16 October, with the harvesting campaign 95% done as of the date. It is unclear, whether these statistics cover occupied territories of Ukraine. October forecast by SovEcon pegged the crop at 91.4 MMT.
EU to raise wheat export despite deteriorated production prospects
The EU’s 2023 wheat crop prospects deteriorated after a prolonged drought during the summer months. The latest USDA forecast is for 134 MMT, virtually in line with the last year, while in June the figure was pegged at 140.5 MMT.
However, the EU accumulated large carry-over stocks at 16.5 MMT vs. 13.3 MMT last season. It will help the EU to increase its export in 2023/24 MT to 37.5 MMT, up 7% y/y. Thus, the share of the EU in the global wheat trade may grow by 2% to 18%.
Argentina to raise wheat export, but crop potential to be watched
Argentina is one more country, that can raise wheat export in 2023/24 MY. Currently, the USDA pegs the country’s export at 11.5 MMT, up 156% from the drought-hit previous season.
However, the production prospects are getting worse in Argentina amid the prolonged absence of adequate rains. So now the crop is seen by October WASDE at 16.5 MMT vs. initially expected 19.5 MMT. Moreover, after the WASDE was published, local Argentinian forecasters revealed their fresh crop figures that were cut down. The RGE reduced its forecast by 5% to 14.3 MMT, and the BAGE lowered its expectation by 2% to 16.2 MMT.
At the same time, long-waited rains were observed across drought-hit agricultural regions of Argentina over the last weekend (after 20 October). The precipitations raised hopes for better wheat conditions.
Canada failed to increase wheat production amid drought
Prolonged drought in the key production areas killed the expectations of bigger wheat crop this season in Canada. October WASDE sees the harvest at 31 MMT vs the initially expected near-record 37 MMT. It is now 10% lower y/y. In turn, Statistics Canada sees wheat crop at even lower level of 29.8 MMT.
The export for 2023/24 MY is seen by the USDA at 23 MMT, down 11 % y/y.
US export to be lower y/y despite higher crop
Despite prolonged drought in the USA this summer, the wheat production is seen up 10% y/y to 49.3 MMT on bigger area and better yield compared to 2022.
However, the export is expected to be smaller than in the previous season. The USDA pegged it at 19.1 MMT, down 8% y/y amid insufficient demand from importers. Moreover, the beginning stocks of wheat is 17% smaller this season at a modest 15.8 MMT.
Recent rains improved Australia’s potential, but crop still seen much lower y/y
Australia is on track to harvest the smallest crop in 4 years, as prolonged dry conditions provoked by El Nino over most of the production regions deteriorated yield potential. The USDA pegged the harvest at 24.5 MMT, down 38% from last year’s record.
However, in mid-October, Australia finally got needed rain. Local experts expect that this will improve yield potential and allow to add several million tons to a crop. Particularly, StoneX raised their wheat harvest forecast by 3 MMT to 26 MMT after the rains were observed across many southern regions. IKON Commodities upped their production expectations by 3 MMT as well to 28 MMT. The figures are now higher than the 10-year average of 26.4 MMT. Moreover, StoneX pointed out that the dry weather through much of the growing season meant the quality of Australia’s crop would be excellent.
Anyway, as the wheat production will be sizably lower y/y, we will see a much smaller export, which is expected at 17.5 MMT, down 46% y/y. Thus, the share of Australia in the world trade may fall from 15% in 2022/23 MY to 9% in 2023/24 MY. However, it would be interesting to see whether the USDA would revise upward its production and export forecast in November after the beneficial rains.
PROSPECTS OF UKRAINIAN WHEAT EXPORT VIA CORRIDOR AND SULINA
Market operators seem to be optimistic about the ability to work through the deep-sea ports, and the CPT market is becoming more active in the Ukrainian ports of the Black Sea. Along with that, the freight rates here remain high, but the growing supply of vessels is expected to bring the rates down. At the same time, the war risks remain high, and several importers do not want to use Ukrainian Black Sea ports. There is always a threat of Russian attack on ports’ infrastructure. There are talks of China making large purchases of Ukrainian corn, so it can be a so-called guarantee that Russia will not bomb Ukrainian ports, as it does not want to upset its Chinese friends.
Besides, there is a problem with mines. On 05 October, a Turkish cargo ship hit a mine in the Black Sea near Romania. The ship sustained minor damage with no harm to the crew. On 19 October, Turkey, Romania, and Bulgaria started working together against the threat of floating mines in the Black Sea. On 25 October, Ukraine claimed four mines dropped in grain shipping corridor by the Russian air force.
As for the export via the Danube ports, the main problem here is constant Russian attacks on the port infrastructure in Reni and Izmail with drones. It resulted in a number of grain storages damaged and trucks burned. However, the ports keep on operating without any significant disruption seen so far. Logistics issues are another problem here, as bad weather or any other delays in vessel passage from time to time result in the accumulation of large queues of ships in Sulina.
We also have five neighboring EU countries, who were not happy with the decision of the European Commission to terminate a ban on import of Ukrainian grain. Negotiations with these countries resulted in the introduction of the licensing system for the export of Ukrainian grain which creates additional headache. However, it does not impact the wheat market, as the 5 states are not buyers of Ukrainian wheat, and the transit via their territories was not affected.
According to AgriCensus (Fastmarkets), analysis of shipping line-up data suggests that activity in Ukraine’s deep sea ports has now increased to levels that are comparable with the early days of the original grain deal, with approximately 800 KMT already seen as loaded or expected to load in the coming days (article as of 10 October). Since the first vessels to enter the ports arrived on 17 Sep, the lineup has significantly increased, with 8 vessels now managing to leave the port carrying around 242 KMT of grains and iron ore. Another 14 vessels have already arrived or are expected to arrive in Ukrainian ports in the near future, with at least 560 KMT of cargo expected to be moved out of the country.
OCTOBER FIGHT WITH CASH MARKET IN UKRAINE
As per information from traders, since approximately 10 October 2023, Ukrainian authorities toughened their fight with the cash market in both Danube and POC ports. Customs completely stopped opening preliminary customs declarations for the volumes, bought under the so-called 2nd form (cash payment for farmer). Moreover, even 1st form contracts had troubles with opening preliminary customs declarations in case the farmer has not registered the tax invoice yet. It was reported by market participants to be contradictory to the Ukrainian low, by which farmers have 15-45 days to register the tax invoice. Such delays with the opening of customs declarations caused unbelievable losses for traders for demurrage. It is in addition to the demurrage, which they initially had due to the long time of Sulina passage after bad weather created a queue of about 100 vessels. Such changes switched traders to cover their contracts from farmers via the first form, thus farmers raised their prices, which pushed the FOB prices in Sulina up and further supported CIF prices as well. Some traders did not manage at all to cover their contracts and were left to hope to find some mutual solution with buyers. It spoiled the image of some traders and looks like conditions are more favorable for the work of multinational companies and agriholdings only. While small traders were reporting as hard to surviving this change.
Trade sources expect the grain flow via the corridor to increase further, as more confidence appears among market participants and more vessels enter the ports. For now, it is not clear if the Ukrainian humanitarian corridor can maintain the same results, or even grow in the same way as the grain deal did when it was first signed - and there are some notable challenges, not least the presence of Russian naval forces in the Black Sea. That comes as there remain several risks associated with loading from Ukrainian ports, and the trade is most likely to be able to trade sometimes only those cargoes that have already been loaded, which limits the activity.
Published by Miller Magazine
https://millermagazine.com/blog/future-of-ukrainian-wheat-export-202324-my-depends-on-the-new-grain-corridor-5427
