The Grain Corridor as a Russian price tool - Atria Brokers for Miller Magazine

Having a record wheat crop at about 92 MMT in 2022/23, Russia uses all its tools in order to mitigate the price pressure. Corridor speculations are its favorite tool, which is having a quite big influence on CBOT and MATIF prices, while the physical market is already reacting calmer. Whenever Russia needs to support prices – it talks about the Corridor. When Corridor does not help, it talks about possible own export restrictions. Very often, such talks are dedicated to TMO/GASC tenders. Or maybe it is just a coincidence, of course.

 

As Yan Kozyrytskyi, partner at Atria Brokers, already mentioned within his presentation at Trend and Hedge Club in February 2023, first of all, we need to state the fact that the place of Ukrainian wheat and corn on the world market is quite different. In the wheat market, Ukraine has more alternative origins, thus importers were not much worried to stay hungry. After the Corridor was launched, most part of the grain started going via its ports: Pivdennyi, Odesa, Chornomorsk (POC). In July-January 2022/23, the volume of grain (wheat, corn and barley), which was exported via Corridor amounted to 55% of total export. Herewith, the share of wheat and barley export via these ports decreased, as Russia, who is #1 Ukraine’s competitor in these crops, seduced major importers via its low prices and good quality. Meanwhile, Ukrainian exporters were left fighting with million dollars demurrages for handies and panamaxes, which the Russian commission kept it the corridor sometimes for over one month time, “checking” if they are safe, and depriving Ukrainian products of their price competitiveness.

For corn price situation was better, as Ukraine is one of the TOP-4 world exporters of this commodity, plus one of its major buyers historically is the EU. Thus, corn was the commodity, which calculated better for the Corridor and its share of export via POC ports increased by about 12% per year to almost 60%. Thanks to this, Ukraine managed almost to preserve the volumes of corn export via all routes (sea/land/trucks/river) on the pre-war level. It exported via all routes 15.4 MMT of corn in Jul-Jan 2022/23, only a slight drop from 15.5 MMT shipped over the same period LY. Of the exported 15.4 MMT - about 67% (10MMT) went to Europe. It means that Ukraine increased export to this destination almost twice per year. Such a spike was caused by decrease of EU corn crop 22/23 by y approximately 25% per year to 54.2 MMT, as well as discovering the port of Constanta for re-export. All this helped Ukrainian corn prices in the poc ports to behave more stable compared to wheat.

One accent is that in general, Ukrainian wheat prices for 11.5 protein handy-size vessels in ports developed negatively during the two Corridor periods (blue and green on the table), losing 12 USD/MT between 05 August and 18 November 2022 and 22 USD/MT during 18 November 2022 and 22 March 2023. The wheat prices were quite stable at around $280/MT for about 2 months (January and February), but Russia’s statement on 60-day extension of the grain deal, meaning a lot of uncertainties and risks, as well as lower demand from importers, who appeared well covered by Russian wheat, led to a sharp drop in the prices in the deep-sea ports of Ukraine. 

 

As for corn prices in ports, they added 5 USD/MT during the first Corridor, but lost 11 USD/MT during the second Corridor. The decline was less severe here, as there was no such pressure from Russian origin as on the wheat market. Corridor became also the sluiceway for Ukrainian grain prices depending on the type of transport. 

 

Before the introduction of the corridor, Ukrainian corn prices developed mostly negatively on high stocks, lots of offers and a very thin export sluiceway (railway/trucks via borders/ barges via Danube and coasters vis Reni/Izmail). Asap as the corridor developed, competition came from CPT deep sea ports originators. Same time EU buyers saw their stagnated corn crop and started increasing railway prices. Their demand was exhausted at the beginning of November, also Russia started speculation on Corridor closure, which could mean the golden rivers of corn to go back to the railway/barges “strait”, thus EU buyers lowered their prices. 

 

After reconfirmation of the Corridor prolongation on 17 November 2022, the barge prices recovered, as here the destinations from Constanta were not only to the EU, whose demand was well covered by that time. According to European Commission data, the EU imported 19.7 MMT of corn from 01 July 2022 to 19 March 2023, compared to 11.9 MMT over the same period LY. As of 24 March, the bid prices for Ukrainian corn on DAP UA-PL railway basis totaled $175/MT, down by $10/ MT w/w and by $40/MT m/m. So, there was a high risk of defaults from the buyers’ side. Moreover, there is competition from European farmers, who are not happy with the flow of Ukrainian corn.  

 

Also, we should underline the spike of corn prices in Reni/Izmail in January-February mostly on short covering and high utilization of these ports, as POC demurrage and deviation costs were unbearable for some participants. 

The grain market was waiting for 18 March to get a clear understanding of the future of a grain deal allowing exports of Ukrainian grain from three ports of the Black Sea and brokered by the United Nations and Turkey in July 2022 and extended in November 2022 to fight with a world food crisis that became more frightening since the start of Russia’s invasion of Ukraine. However, currently, there are still blind spots on the deal’s future. 

The talks on the extension of the agreement started on 13 March, one week before its expiry date, and Russia declared that it wanted to extend the deal for 60 days, instead of 120 days agreed in the terms of the agreement. Russia kept on using food as a weapon and blackmailing the world demanding the easing of western sanctions imposed on Russia for its invasion of Ukraine. The export of Russian food and fertilizers are not sanctioned directly, but a terrorist state says that the restrictions on payments, logistics and insurance industries are a barrier to shipments, so they want them to be eased. Russian UN Ambassador Vassily Nebenzia said on 17 March that they gave the western countries two months to ease their sanctions if they want the grain agreement to remain in force.

 

It should be noted that China, the main partners of Russia, stated that it wanted the grain deal to be preserved. China issued a peace plan for the Russia-Ukrainian war and included a paragraph on facilitating grain export in its plan. China said that all parties needed to implement the Black Sea Grain Initiative fully and effectively in a balanced manner. China is one of the key importers of Ukrainian grain, mainly corn, so it is interested in the functioning of the grain corridor. In turn, Russia is dependent on China, and it might not wanted to upset its key partner ahead of the visit of Chinese leader Xi Jinping to Moscow on 20-22 March. Thus, the role of China in the extension of the grain deal seems quite sizable. 

 

When Russia stated it want the agreement to be prolonged for 60 days, all other parties to the deal were insisting on 120-day extension. On 18 March, the Black Sea grain deal was extended. However, the market did not get a fully clear understanding of the situation. Russia said the agreement was extended for 60 days and revealed a letter dated 16 March with which they officially informed about their intention to extend the deal only for half of its term. In its turn, Ukraine said that the deal was prolonged for 120 days, while both the UN and Turkey did not specify the period of extension, with the Turkish Foreign Minister saying that Turkey would make efforts to further prolong the Black Sea grain deal.

 

On 20 March, Russia stated that it would not agree to the further extension of the grain deal after 60 days (ending on 18 May) unless access to the SWIFT financial messaging system for Russian state-owned agricultural bank Rosselkhozbank is restored. Moreover, it wants a resumption of supplies of farm machinery and spare parts as well as services, the unblocking of foreign assets and accounts held by Russian companies dealing with the production and transportation of food and fertilizers, and the abolition of restrictions on insurance and reinsurance, plus the lifting of the ban on access to ports. Russia also wants the work of the Togliatti-Odesa ammonia pipe to be restored. In addition, Russia said that it did not get any formal objections to its 60-day extension position. 

 

To sum up all the above, currently, we have the grain deal extended, but we do not have a clear understanding of the period. There was no information on changes to the deal’s terms, so one can assume that it was prolonged for 120 days, but Russia’s position means that it will prevent the functioning of the grain corridor after the 60-day period ends unless its conditions are met. 

 

The risk that the functioning of the grain corridor will be disrupted by Russia in 60 days does not allow the Ukrainian grain market to function properly. The problem is that the 60-day period is too short taking into account the long waiting time to pass through the inspections by the Joint Coordination Centre (JCC) in the grain corridor in the Bosporus, as Russian inspectors do everything to slow down the process. Due to all delays, some ships are waiting for more than a month to pass through the Bosporus. As a reminder, a vessel should pass the inspection twice – when it is heading to Ukraine and when it is moving loaded with grain to its destination.

Today, the import duties on major grains are zero in Turkey. However, Turkey, one of the key importers of Ukrainian grain, is planning to raise the duties since 01 May to 45% for wheat, 25% for corn, 35% for barley. So, currently, Turkish buyers required shipment until 15-20 April with no extension for the period, in order for a vessel to have time to reach Turkey before 01 May, as they want to avoid payment of the duties. 

In the global arena, there were no severe concerns about the extension of the grain deal. The market operators were closely watching the situation around the Black Sea grain agreement. However, looking at the price trends, it seemed that they were quite sure that the deal would be prolonged. 

 

Starting from 17 February, the weekly prices of wheat and corn were declining on the Chicago Board of Trade. The uptrend was observed only at a week preceding to 18 March. This week was nervous with turmoil in the banking sector and the overall uncertainty during the week of the talks on the deal extension with Russia declaring on a shorter period of extension. High demand for US corn exports provided additional support.

 

However, it turned out that the extension of the Black Sea grain agreement for a shorter period is not considered as a bullish factor to the world market. On the first trading day after the deal was prolonged, on 20 March, the wheat and corn markets were weaker and pressured by the agreement extension. It seems that the market considers any prolongation of the agreement as a bearish factor, as cheap Ukrainian wheat and corn still get access to the global market, despite the slow flow of grain via the grain corridor due to a low number of daily inspections. The market still has a large supply of Russian wheat that lets it stay quite calm regarding the availability of Black Sea wheat in the world arena. For corn, a massive supply of Brazilian grain allows such major importers of Ukrainian corn as China and the EU to cover a sizable share of their needs. 

 

However, the fact that the market does not have a clear understanding of the period of the grain deal validity makes some operators believe that any further significant decline in wheat prices is not about to happen, especially if we take into account the initial prospects of next season production in the world. Moreover, on 24 March, Russia again used its market manipulations with information that appeared in the Russian newspaper Vedomosti reported that Moscow could recommend a temporary halt in wheat exports. However, later on the same day, Reuters reported that several sources told it that Russia had no plans to halt wheat exports, but wanted its exporters to ensure prices paid to farmers are high enough to cover average production costs. Russia’s speculations resulted in a sharp increase in wheat futures on Friday, 24 March, and curb the weekly price decline. On 29 March, top agricultural commodities trader Cargill Inc. said it will stop exporting its grain from Russia, adding to uncertainty over the future of Black Sea crop shipments, and heating the prices.

After 18 May, when the grain deal may be disrupted, it will be a quite short time until new-crop wheat will start to enter the market. Currently, we hear different news regarding the next harvest coming from key producing countries. In Ukraine, the overall grain crop is seen falling to 44.3 MMT from 53.1 MMT, AgMin said on 20 March. The official forecast sees wheat production at 16.6 MMT, down from 20.5 MMT in 2022, and corn crop at 21.7 MMT, down from 25.6 MMT LY on reduction of the grain planted areas and projected decline in the average yields due to growing prices of inputs.

 

Wheat production in Russia will decrease significantly in 2023 as well. Consultancy SovEcon sees the crop at 85.3 MMT, down from 101.2 MMT in 2022. 

In the US, winter wheat plantings were hit by the drought. According to the USDA, US farmers planted 14.95 MLN HA of winter wheat for the 2023 harvest, the highest area in eight years. However, dry weather conditions have threatened crop prospects in portions of the southern Plains winter wheat belt. As of 20 March, only 19% of winter wheat in top producing state Kansas was in g/e condition. In Taxes, the second biggest winter wheat state by planted area, 23% of plantings were in g/e condition. However, the last USDA’s report revealed some improvements in wheat condition. After that, prices also found support ahead of the 31 March annual U.S. Department of Agriculture (USDA) planting intentions report.

 

 Moreover, the government of India on 28 Mar said the export ban on wheat will continue, as long as the country does not feel comfortable with the domestic supplies to meet the food security needs. In India, unseasonal rains and hailstorms have damaged winter wheat in northern, central and western plains. After a dry spell, untimely rains hit winter wheat just before harvesting begins. India’s new crop wheat has just started coming to the market. The Indian government sees the wheat crop increasing to a record 112.2 MMT in 2023, but adverse weather may cut the expectations, and some market operators are less optimistic regarding the possible record production. Last year, a drop in India’s wheat production resulted in smaller purchases of the state reserves and a ban on exports.

 

On the other hand, the production prospects in the European Union look quite optimistic at the moment. In the recent MARS report, wheat yields in Europe are seen growing to 5.99 MT/HA for the next harvest, which will be 3% higher compared to 2022. Consultancy Strategie Grains sees the EU soft wheat production at 129.5 MMT in season 2023/24, up by 3.5% from 2022/23 MY. 

 

Currently, timely rains in France and elsewhere in western Europe are putting pressure on the futures. At the same time, the expected decrease in Ukrainian crops and the condition of US winter wheat are providing support. A lot will depend on the weather in the key producing countries in the coming months.  

Published by Miller Magazine
https://millermagazine.com/blog/the-grain-corridor-as-a-russian-price-tool-5105