Valerii Liulchenko Christina Serebiakova
Broker & co-founder Broker & head of analytical department
Atria Brokers Atria Brokers
With bumper supplies of Russian and European wheat for MENA and Canadian origin for Asia, competition for Ukraine to become even tougher in 2023/24 MY. Lower Ukrainian wheat crop 2023 to be compensated by abundant EU, Canadian and Russian production. Ukraine to lose another 2% of global wheat export pie in 2023/24.
Introduction
In 2023/24, WASDE sees that Ukraine is on the way to lose another 2% in the world export pie. This will be the second consecutive 2% decrease, following the start of Russian war Ukraine. Before war Ukraine had about 10% in world export pie, in 2023/24 MY, the share could drop to 5%. In May report, the USDA sees Ukrainian wheat export-23/24 falling by 33% to only 10 MMT, as the crop will decrease by 21% to 16.5 MMT. Smaller export potential will add to the stronger competition from the key opponents, as almost each of them will have larger production in 2023/24 MY. Russia is going to have another massive supply, as huge stocks will add to the fourth largest crop at 81.5 MMT. The EU is on course to increase wheat harvest by 3% to 139 MMT. On the other side of the globe, Canada will have chance to increase its wheat production by 9% y/y, as well as Argentina may return to the market with near-record 19.5 MMT of wheat output. Competition is expected to be very high and, in this article, we will show who will become the key wheat buyer for Ukraine and for other origins.
COMPETITION FOR WHEAT BUYERS LOOKS TO BE TOUGH
With bumper supplies of Russian and European wheat for MENA and Canadian origin for Asia, competition for Ukraine to become even tougher in 2023/24 MY.
The volumes of wheat Ukraine shipped to virtually each of its key buyers decreased in Jul-Apr 2022/23 MY compared to the year earlier. Turkey is one of few exceptions, as its stronger demand and possibility to ship by small vessels allowed Ukraine to maintain its presence on the Turkish market. However, it is difficult for Ukrainian exporters to compete against massive supply of Russian origin, offered to market at cheap prices. The situation may worsen in 2023/24 MY. The supply of Ukrainian wheat definitely will decrease, while Russia is expected to have even more wheat to offer.
On the market of North Africa, Ukraine traditionally will compete with Russia and the EU. Here we see that the volumes shipped from Ukraine in Jul-Apr 2022/23 MY decrease drastically toward all destinations. At the same time, Russia substantially increased shipments to Egypt, Algeria, Tunisia and Libya. Due to its attractive price, Russia managed to partially squeeze the EU out of the Egyptian market. In turn, the EU remained strong on the market of Algeria, as well as strengthened its positions in Morocco.
Asian destinations that used to be large consumers of Ukrainian wheat have mainly turned to Australian and Canadian origins. Bangladesh is the only destination here, where Ukraine managed to raise shipments. Further export of Ukrainian wheat to Asian market does not look bright unless Ukraine would be able to ship its grain via deep-sea ports in more or less normal way. Much smaller supply of Australian wheat in 2023/24 MY may give some hope for better demand, however, Canada is on course to bumper wheat crop and it should have sizable volumes to offer to Asian buyers.
Bigger wheat crop and changes in import structure to curb Turkey’s demand in 2023/24 MY
The USDA sees Turkish wheat import at 10 MMT, down 5% y/y. We should remind that in 2023/24 MY Turkey returns to the trade structure that existed in 2018, when flour millers first had to fulfil a flour export contract and only then they could obtain licenses for duty-free wheat imports. For companies without licenses, the import duty on wheat is 130%. Therefore, flour mills will firstly purchase wheat on the domestic market, while a more or less intensification of imports is expected only since September 2023.
The USDA forecasts Turkey’s wheat harvest 2023 at 19 MMT, up 10% y/y, while Turkish statistics office says in its first crop output estimate of the year that the production of wheat will amount to 20.5 MMT, up 3% y/y. According to AMIS, the conditions are favorable in the country as crops enter the reproductive stage. The beginning stocks is seen by the UDSA at 2.6 MMT, up 16% y/y in 2023/24 MY.
Egypt to increase wheat import
The USDA expect wheat export to Egypt at 12 MMT in 2023/24 MY, up 9% y/y. The growing population combined with lower output at 8.7 MMT (-6%) and smaller beginning stocks at 3.1 MMT (-15%) will push Egypt to purchase more wheat abroad.
According to May MARS report, thermal conditions were slightly above the climatological average in Egypt, allowing good ripening. The amount of precipitations was lower than average, however, most of the cereal production in Egypt is not influenced by rainfall variations, since it relies on the irrigation. Satellite imagery suggests that cereals are in average to above-average condition, which indicates that there has been sufficient water supply from irrigation to support adequate crop growth during flowering and ripening. The harvest of wheat is about to begin under favorable climatic conditions. The yield forecast is close to the 5-year average at 6.73MT/HA.
The Maghreb is suffering from the worst drought in recent decades
Unlike Egypt, other North Africa is facing poor wheat crop in 2023 amid ongoing drought that will force importers to increase foreign purchases.
The USDA forecasts wheat import to Morocco at 7.5 MMT in 2023/24 MY, up by 7% y/y. After catastrophic 2022/23 season, the harvest is expected to increase in 2023/24 MY even under drought condition, and amount to 3.8 MMT, up 41% y/y, but still significantly lower than 7.5 MMT in 2021/22 MY (USDA estimate). The beginning stocks are seen at 1.7 MMT, down 28% y/y.
According to May MARS report, in Morocco, the yield outlook for wheat remains negative. The combined effect of seasonal drought and high temperatures hampered crops during vegetative and reproductive stages and accelerated crop senescence. Scarce and unevenly distributed rains were observed since February until the beginning of March and almost no rain at all was observed in the March-May period, thus worsening an already very poor agricultural campaign. At the same time, temperatures remained consistently warmer than usual. The harvest is about to begin and the overall yield and production prospects are poor, however, not as bad as the previous season, which was one of the worst of the past 15 years. MARS sees wheat yields well below the 5-year average at 1.48 MT/HA, down 17% from average.
The USDA sees Algeria’s wheat import at 8.5 MMT in 2023/24 MY, up only 4% y/y, despite unfavorable production outlook. It is due to growth of the beginning stocks by 12% y/y to 4.9 MMT. The country’s crop is seen at 2.7 MMT, down 27% y/y.
The yield outlook remains negative for wheat in Algeria, according to MARS report. The combined effect of a long-lasting drought and hot temperatures in most of the country’s cereal producing areas, hampered crops during flowering and grain-filling, thus deteriorating an already unfavourable season. There has been no rain since the beginning of March, and in most regions, rainfall cumulates during the review period set the lowest records in MARS archive (since 1979). Temperatures were above average as well. The yield forecast for the country is far below the 5-year average at 1.28 MT/HA, down 24% from average.
The USDA forecasts wheat import to Tunisia at 2.3 MMT in 2023/24 MY, up 28% y/y. The output is seen at only 0.8 MMT, down 35% y/y, with beginning stocks seen at 0.6 MMT, down 14%.
Wheat in Tunisia is also negatively impacted by persistent drought conditions. MARS’s yield forecast for the country are far-below the 5-year average at 1.62 MT/HA, down 19%. The winter crop campaign in Tunisia has been markedly affected by drought. Rainfall occurred in sporadic and low-intensity events, mostly in early March and the beginning of April. Cumulative precipitation during the review period was the lowest of the 1979-2022 historical series in almost all central and northern regions of the country, where most of the national cereal production takes place.
Untimely rains may force China to buy more wheat
China is seen as the leading wheat importer in the world in 2022/23 MY, with 13.5 MMT. For the new season, the forecast is at 10.5 MMT, down 22% y/y. However, recent adverse weather may result in lowering of production prospects and upward revision of import forecast. Mainly, China will require more milling wheat, as the quality of its own crop may deteriorate after heavy rains.
China has started harvesting what is expected to be a bumper wheat crop (140 MMT, up 2% y/y according to the USDA). AMIS report noted that harvesting of winter wheat began under favorable conditions. However, after the report release, heavy rain has flooded wheat fields in China’s central Henan province that is the core region of wheat growing accounting for about 28% of total staple output. The rain is causing some of the wheat to sprout or become affected by blight. More rain is forecast for this weekend in western Henan. China’s AgMin has urged local authorities to speed up the harvesting and drying of damaged wheat. According to Reuters, Shanghai-based Sitonia Consulting said it was too early to say how much output would be affected, but “the harvest is definitely going to be impacted. The harvest was just ramping up and some areas have seen 400% precipitation anomalies over the past 10 days.” Around 30 MMT will be impacted by the precipitation, estimated the consultancy, with between 10-20 MMT likely to have sprouted.
UKRAINE TO LOSE ANOTHER 2% OF GLOBAL WHEAT EXPORT PIE IN 2023/24
Basing on the May USDA forecast, the share of Ukraine in the global wheat export will decrease further to 5% compared to 7% in 2022/23 MY and 9% in 2021/22 MY. In turn, the shares of the key competitors – Russia and the EU – will increase.
The export forecast for Ukraine in 2023/24 MY looks gloomy, as the available volumes for trade may amount to only 10 MMT (USDA forecast), down by 33% from already low level expected for 2022/23 MY at 20.9 MMT (-20% y/y). However, the forecast from the UGA is quite more optimistic at 15 MMT for 2023/24 MY, as they see the beginning stocks at massive 5.3 MMT. This compared to 2.24 MMT expected by the USDA.
As of 05 June 2023, the vessel inspections pace in the Joint Coordination Center is very slow, as Russians inspect maximum several ships per day or they do not conduct inspection at all without providing any reasons. Russian propaganda always says that Ukrainian grain does not go to the poorest countries, however, it is Russians, who do not let the grain flow to its destinations, as they prefer to allow the passage of ships heading to Turkey or friendly China. Additionally, Russia is blocking vessels to pass through the inspection to the port of Pivdennyi. It uses these two levers – inspection pace and port of Pivdennyi – to force Ukraine to unblock the ammonia pipeline to transit Russian fertilize via the territory of Ukraine. On 05 June 2023, Russia’s foreign ministry said that it saw no prospects for extending the grain deal, adding this to a mountain of threats.
On the other hand, we have five EU neighboring states, who claim that their farmers suffer from massive Ukrainian supply, but not from long-lasting falling of grain prices on the global market. As the result, on 02 May, Ukrainian wheat, corn, sunflower seed and rapeseed were banned for import to Romania, Hungary, Slovakia, Poland and Bulgaria until 05 June, with transit via the territory of these states remained in force. On 05 June 2023, Poland’s agriculture minister said he had received a draft regulation from the European Commission extending the import ban until 15 Sep. For wheat, this ban is not painful, as the crop is going via their territories as transit. However, the negative effect is for trade with sunflower seed, as this crop used to be processed in Bulgaria and Hungary. At the same time, the overall trade is suffering from complicated procedure to pass through the borders.
Higher wheat output in Romania, Hungary, Slovakia and only slight decrease in the crop production in Poland will cause additional problem for re-export of Ukrainian wheat via the territories of these countries due to heavier load on their logistics. It may result in further protests of farmers of the neighboring states.
In May WASDE report, the Ukrainian wheat crop 2023 was pegged at 16.5 MMT, down 21% y/y. It is lower than the local forecast from the UGA at 17.9 MMT (-11% from 20.2 MMT in 2022/23 MY). Taking into account the weather forecast, we should keep an eye on the effect it will have of production prospects.
According to AMIS report, May was drier than average in Ukraine, however, the April rains were enough to maintain favorable conditions in most regions except in the south. So, the southern region is the subject to watch. Ukraine’s NAAS said in a report that most of Ukraine’s winter grain crops were in good condition, but grain yields could fall sizably if current dry and hot weather persists. Scientists noted that crops which were sown very late were particularly at risks, and that the area under such crops was quite large this year.
For spring wheat, the absence of rains in May allowed to speed up the planting progress. According to official data, as of 01 June, spring wheat was planted throughout 269.5 KHA compared to 189.3 KHA as of 26 May, 2022, as Ukraine is on course to plant a record area with spring wheat this year that is expected by AgMin at 285 KHA. The next two weeks seem to be hot and dry with lack of precipitations and growing temperatures that can lead to decline of soil moisture level.
Russia to fortify as leading wheat exporter
Basing on the May WASDE report, we see that the share of Russia in the world wheat export will increase 1% y/y to 22% in 2023/24 MY. It will raise foreign supplies by 2% y/y to record 45.5 MMT (May WASDE forecast). The local analysts see the export at 43-44 MMT and do not rule out the upward revision.
Russia has demonstrated strong export pace in 2022/23 MY, with May wheat shipments estimated by local experts at about 4 MMT compared to 1.5 MMT on average. They also pegged June shipments at about 2.9 MMT that will surpass the previous record of June 2018 (2.8 MMT). Despite such performance, the USDA expects a record ending stocks of wheat in Russia this season at 17.6 MMT, +5.5 MMT y/y amid huge production. This will let the country to increase shipments and remain the leading global wheat exporter in 2023/24 MY.
The shipments of Russian wheat will also be facilitated by revise export policy. The country’s government has raised its base price for calculating wheat export tax, according to a decree published on an official government website on 27 May. The decree came into force on 01 June, 2023. The new base price for calculating the wheat export tax was set at 17,000 RUR, the document showed. It was previously at 15,000 RUR/MT. The move has already led to sizable lowering of wheat export duty on the firth week after the new policy was introduced. For 07-13 June, 2023, the export tax for wheat will be 2,856.3 RUR/MT vs 4,525.4 RUR/MT on the previous week.
Huge stocks will compensate for lower production. The May USDA forecast sees Russian wheat crop at 81.5 MMT, which is 11% lower y/y, but is still 4th largest output on record and up by 8% compared to 2021/22 MY. The local experts expect the crop in a range from 84 to 88 MMT.
The AMIS reported that in Russia weather conditions were favorable for winter wheat and for the continued sowing of spring wheat. As of 02 June, 13.3 MLN HA were planted with spring wheat compared to 11.9 MLN HA in the same period of 2022. The area has already surpassed the forecast of the Russian AgMin by 3%. Current rains are favorable for filling of winter wheat and development of spring plantings in southern regions. However, the precipitations may hamper the quality of the crop. At the same time, at the beginning of June the local experts started to underline that over 50% of the area under Russian spring wheat has been extremely dry and hot and the forecast remains drier than needed.
Bright EU production outlook may be darkened if dry spell persists
Under the current USDA’s forecast, the share of the EU in the overall global wheat export will increase by 2% in 2023/24 MY to 18%. The USDA pegged the EU 2023/24 wheat export forecast at 38 MMT, up 10% y/y.
The beginning stocks in the next season are seen at massive 16.2 MMT, up from 13.3 MMT year earlier. The EU farmers managed to accumulate high reserves even under condition of smaller harvest in 2022/23 MY, as they were waiting for more attractive price too long and missed a chance to sell with high profit.
For now, the EU wheat harvest 2023/24 is seen at 139 MMT, up 3% y/y. According to FranceAgriMer, the current condition of French soft wheat is at 91% rated good to excellent in the week to 29 May. It is well above the 67% registered a year earlier. It is also the best condition score for the past ten years. However, the last week marked 2% decrease in the score. Thus, probably, a dry spell observed since late May in the northern half of France was starting to affect the crop. The forecast up to mid-June will bring below-normal precipitations as well.
As for such Black Sea competitors of Ukrainian wheat like Romania and Bulgaria – as per different local sources their wheat crop in 2023 may increase by 8% y/y for Bulgaria up to almost 7 MMT and by 9-11% y/y for Romania to 9.8 MMT.
US farmers to abandon huge areas under winter wheat
As drought vanishing hopes for production increase, the export potential of US wheat will be lower compared to the preceding season. The USDA sees shipments of US wheat in 2023/24 at 19.7 MMT vs 21.1 MMT for 2022/23 MY, with the US share in world trade falling by another 1% per year to 9%.
The USDA sees the US wheat crop at 45.2 MMT in 2023/24 MY, only 1% increase from the previous season. The USDA estimated the US 2023 winter wheat planted area at 37.5 MLN AC, up 13% from LY, however, prolonged drought curbing yields and smaller area under spring wheat allowed to expect only for shy surplus of total wheat production. The weather in the US should be the factor to watch, as the amount of precipitations is still not enough.
In the US, winter wheat in the central and southern Great Plains has suffered from prolonged drought, leading to reduced yields and higher-than-average abandonment levels. Thus, farmers in Kansas are expected to abandon about 19% of the area planted compared at 10% LY and 4% in 2021, Reuters revealed during its three-day tour of the state in the second half of May. However, market participants warn of an even greater percentage of unharvested area. According to Reuters, nationally, winter-wheat farmers plan to abandon 33% of the acres they planted, the highest percentage since World War I, the USDA said.
Recent rains in the central and southern Great Plains seems help to improve the situation slightly. However, the forecast for the first half of June does not show significant precipitations. As of 28 May, the winter wheat crop was rated 34% as good to excellent condition, up from 32% previous week and 29% year ago. Sowing of spring wheat is continuing across the US, with 85% planted as of 28 May, up from 64% week ago and close to five-year average of 86%.
Canada to deliver bumper wheat crop
May USDA sees Canada’s wheat export in 2023/24 MY at 27.5 MMT, up by 6% y/y. Current production expectation gives Canada a possibility to increase its share in the global wheat trade to 13% vs 12% in 2022/23 MY and only 7% in 2021/22 MY.
For now, prospects of wheat production in Canada look good, with the USDA expecting the crop at massive 37 MMT, up 9% y/y. However, if the weather does not improve for spring wheat, the forecast may be adjusted downward.
In Canada, winter wheat conditions are generally favorable while spring wheat sowing begins under drought conditions in provinces Alberta and Saskatchewan. According to a Statistics Canada survey, Canadian farmers will plant about 30 MLN AC of all-wheat, up 6.2% y/y, including 6.1 MLN AC of durum, up 0.9% y/y.
Argentina to return on the market with close to record crop
May USDA pegged Argentina’s 2023/24 wheat export at 13.5 MMT, up by 145% from drought-affected 5.5 MMT in 2022/23 MY. The production will increase by 55% to near-record 19.5 MMT.
Wheat planting for 2023/24 crop was 6.3% done in Argentina by 01 June 2023, BAGE said. Favorable rains were observed in Argentina’s Pampas crop belt at the end of May, paving the way for wheat planting in the east, the RGE said in a report. But, more than half of the Pampas are still too dry to plant wheat.
El Nino to hit Australia cutting crop by 26% y/y, export by 32%
May USDA expects Australian wheat export to drop down by 10 MMT or 32% y/y to 21 MMT in 2023/24 MY, with the share of Australia in the total global trade falling to 10% vs 14% in 2022/23 MY and 2021/22 MY.
May USDA pegged Australian 2023/24 wheat crop at 29 MMT, down by 26% from bumper production in 2022/23 MY and by 20% from two years ago level. The forecast from ABARES is even lower at 28.2 MMT.
Sowing is continuing in the eastern states under mixed conditions due to low soil moisture levels. According to meteorologists forecasts, Australia is going to face unfavorable effect of El Nino this year, which is expected to develop in the coming months and bring hot, dry weather across the country. Some experts predict longer term dryness in Australia from now until at least August. The country is forecast to see below-normal rains and higher temperatures during the crucial southern hemisphere winter months.
The new season does not show much hope so far for Ukrainian wheat. With poor functioning of the grain corridor and constant threats from Russia to quit the grain deal, Ukraine will not have opportunity to sell any sizable volumes of its wheat to remote destinations. On the closest markets, such as Turkey or North Africa, Ukrainian exporters will have to compete with massive Russian and European supplies, while the harvest of wheat in Ukraine is going to decrease significantly for the second consecutive year. Good production prospects may allow Russia to continue offer its wheat at low price and burden additional pressure on Ukrainian exporters. At the same time, traditionally May WASDE shows the maximum possible forecast for production, while in June and July very often are possible some production cuts. Thus, all eyes of market players will be on weather development.
*More interesting insights about trade matrix of corn and soybeans you can receive within the frameworks of presentation by Yan Kozyrytskyi, Broker and Co-founder of Atria Brokers within 6th Fastmarkets Grain and Oilseeds MENA 2023 Conference on June 21-22 in Cairo, Egypt.
Published by Miller Magazine
https://millermagazine.com/blog/ukrainian-wheat-202324-n-search-of-buying-demand-5210
Published by Miller Magazine
https://millermagazine.com/blog/ukrainian-wheat-202324-n-search-of-buying-demand-5210
