Market is tend to forget about the trade wars, and the grain quality is more important than the currency factor — MGT Black Sea

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APK-Inform

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The high wheat production and the record export from Ukraine are the main features of the beginning of 2019/20 MY. Herewith, the high supply of the grain provided the substantial pressure on the domestic bid prices of wheat. On one hand, this factor increased the demand on wheat in terms of export and helped to offset some problems with the quality. On the other hand, this factor together with the hryvnya strengthening led to the significant short-received profit of agrarians.

How did the market perform in such conditions? Which other factors influenced the market operations since the beginning of the season? Is there any effective mechanisms to hedge the currency risks? Which is worse: the trade wars or hidden trade barriers?

APK-Inform Agency discussed these and many other issues with the CEO at Millcorp Grain Trading Black Sea, Walenti Selvesyuk.

 

Walenti, Your company specializes on the export of wheat. How does Your company operate in terms of the high production of wheat in the Black Sea region in general, and in Ukraine in particular? Why has Ukraine managed to reach the record exports of wheat? What features of the market functioning since the beginning of 2019/20 MY could You note?

This year, Ukrainian agrarians harvested the record wheat crop. At the same time, the experts started to forecasts the high production long before the harvest, and the market reflected respectively with the price cut. And this was the main driver of the active export since the beginning of the season. Especially, since this year the traditional competitor of Ukraine — Russia was not in hurry to decline the prices, due to the uncertain production, some structural changes on the market, and strengthening of the ruble exchange rate this summer.

As a result, Ukrainian wheat was beyond the price competition on the global market and even the hryvnya strengthening did not interfere with the record export.

This year, Egypt, Turkey and several other countries were added to the list of the main importers, which traditionally purchase wheat at the beginning of the season, such as the Sough-East Asian countries.

Unfortunately, it should be noted that due to the high production of wheat this season there is a decline of its quality, which was instantly noted by importers. Nevertheless, the export of wheat from Ukraine is so high, that the country has already realized the surplus of the export potential, thus it is ahead of the last year results.

 

This September, hryvnya made a three year high. How did it effect on the selling activity of grains and oilseeds by agrarians and the price policy?

The Ukrainian market of the grain is export-oriented. Nearly 2/3 of the wheat harvest is exported, and nearly 3/4 of corn harvest. That is why, all agriproducers monitor the hryvnya exchange rate and are ready to adjust prices, considering the changes in currency exchange rate.

However, if hryvnya strengthen more, Ukrainian agrarians are rather suspicious and skeptical. The economy develops, and strengthening of the national currency exchange rate proves it. In such conditions, agriproducers can support the prices by restraining the selling. At the same time, considering that the main part of the produced grain in Ukraine is exported, the policy of the sale restraining is not a crucial factor and there are always agrarians who thinks differently or those who need money.

The strengthening of hryvnya is not a big problem itself, it has been just unexpected and caught some market participants off guard.

Herewith, the process of the hryvnya strengthening in Ukraine was not as difficult, as the national currency strengthening in Russia. That is why, in terms the lowering of dollar and the strengthening of ruble the Russian agrarians do not understand, why they must lower the prices but don’t do it.

 

What losses after the hryvnya strengthening did Ukrainian agrarians and traders suffer? How wide are the currency risks hedging tools in Ukraine?

Of course, in such conditions the agrarians’ profit is less. If traders miscalculate, they also may bear losses due to gap in exchange range.

I believe that in this situation there is a positive moment: all the market participants have acknowledged that the hryvnya rate can both go up and down so it is necessary to look for the instruments of protection. And such instruments exist but are not common in Ukraine, unfortunately: not all the bank provide them and not all the clients are willing to use them. And now, they will take a close look at the risk hedging tools, after some significant currency fluctuations.

In general, the currency exchange rate volatility is normal. The ratio of euro rate to dollar rate also changes all the time. But earlier nobody actually considered it seriously, there was a tendency of hryvnya rate devaluation and everything was more or less expected. Now, this task is becoming more complex and difficult. So, first of all the trader must protect his interest and hedge himself. While purchasing the product for hryvnya the exporter must fix this rate thus providing safety measures against any surprises. Fixing of the exchange rate is a matter of the collaboration of the trader with the bank. If he does not do it, he throws himself at fate’s mercy. In this case the trader can both lose or profit from the currency exchange rate difference. But the key question here is the fact the trader does not control the process.

 

How do You evaluate the effectiveness of the bank instruments of currency risks hedging?

These instruments are effective but still are rather expensive in Ukraine. Because, if some bank launches the products the other bank don’t have, it can settle the high price. With the competition from other banks comes the product cost cut.

The question is how wide these instruments will be. And it is quite difficult issue for the small banks. But for the large banks which have large money flows and foreign currency translation this is not the problem but the extra profit even if the cost of these instruments declines.

This is important not only for the agricultural industry of Ukraine but also for all export-import operations. All foreign currency operations have the risk control — it is a significant part of the trade and the whole process as the profit comes with delay. In terms of grain export, you cannot sell the product and ship it in one day, you need time for logistics: at least one week, at most 3-4 weeks. This is a rather long period for the changes in foreign currency rates. On the other hand, to fix the hryvnya rate and to know what is your profit and to hope it to increase and to receive more — this is a decision of the market participants.

 

Considering the record export deliveries of wheat from Ukraine and currency fluctuations in competing-countries can we say that strengthening of the hryvnya somehow influenced the grain demand on the global market? Or the quality issues are still at the first place?

Importers do not really care about the internal currency rate changes in exporting countries. The demand can be influenced by the prolonged strengthening or devaluation of the national currency exchange rate.

If we look at this issue with the reference to wheat and the tendencies of the currency exchange rate in Russia, which is a main competitor of Ukraine on the global market, we can say that both countries are in equal conditions.

 

If we speak about the Egypt’s tenders, as a result of euro rate decline, Ukrainian wheat had to compete with the European. Taking into account the quality parameters of the grain, how did it influence the deliveries of wheat from Ukraine to Egypt and its competitiveness in general?

The euro rate declined slightly and it did not affect significantly the competitiveness of the Ukrainian wheat. It is possible, that this has led to the decrease of the agriproducers’ profit, traders’ loses, who did not get insured in time. But nothing more. The competitiveness was provided by the final price, which is of course effected by the currency exchange rate. But it is not the only factor. In this case, the procurement price and the production cost are taken into account and the production cost in Ukraine is lower than in Europe which allows it to reduce the prices more active. Also, during the final price formation the transportation and logistics are also taken into account. And here Ukraine has a geographical advantage in terms of the deliveries to the Middle East, East Africa and South-East Asia. Thus, I believe that the competitiveness of the Ukrainian grain is high.

At the same time, in 2019/20 MY many buyers of the Ukrainian wheat are disappointed by its quality. And this issues is highly noticeable in terms of work with the millers, which are rather conservative. If in the previous two seasons Ukrainian wheat demonstrated has proven itself with high quality, this season unfortunately it demonstrated rather low results. I suppose that the quality of grain influences the competitiveness more than the strong hryvnya.

 

In recent years, the global market is saturated with the impact factors (both the fundamental: S&D, and the political: escalation of conflicts and trade wars, toughen sanctions). How to work in such conditions? How do You evaluate the importance of the currency factor or is it go to the background?

The currency exchange factor definitely does not go to the background. It will always be one of the main factors of influence on the market so it should be counted. Speaking of the trade wars, they have always been present, although more local, but they are also quick to forget.

The current trade war between the USA and China are more global and they influence greatly on the market (of soybeans, and the relative markets). Such a high influence is because first of all there were no such conflict before, and second, the market participants are constantly kept on the edge of the unpredictability of the American president who showed himself to be sometimes illogical and irrational. Perhaps, this is his tactics and style. And we remember that the mere “twit” by Trump raised the Chicago exchange by 20 cents. On the other hand, I suppose that partially we have got used to them and now the market is more reserved.

 

What are Your expectations over the collaboration between Ukraine and Turkey after Turkey witnessed sanctions because of the conflict escalation with Syria?

Perhaps, there will be some consequences, but until now there are any and the trade is going as usual. It is necessary to monitor further developments. Here it is important to know how these sanctions will be intensified, how they will be accepted by the international society and most importantly — whether Ukraine supports them.

If we look at the exports of the Ukrainian wheat to Turkey, the volumes only for 3 months of 2019/20 MY have exceeded the results of the previous full season. Also, Ukraine actively exports to Turkey corn, oilseeds meals, oilseeds and pulses. Such significant increase of the import of Ukrainian wheat by Turkey is because of the decrease of the domestic production by 4 mln tonnes and the disappointed expectations of the large volumes of Russian grain.

 

How can You comment on the periodical use by importers of the mechanisms of the tariffs and non-tariff regulations such as taxes or unbearable quality requirements?

Besides the open trade wars, there are subtle ones, which are constant. The different trade barriers significantly influence the market, which are periodically implemented by the different countries in order to regulate the import volumes.

Among the positive sides, I can note that this year there was a breakthrough. Saudi Arabia nearly allowed Russian grain to its tenders, informing about the relaxing the demands to the imported wheat thus increasing the tolerant level of the kernels damaged by the corn bug from 0% to 0.5%.

But there is another country, Algeria, which being the large exporter is protecting the governmental purchases from the Black Sea grain by using the unbearable quality requirement — 0.2% level of the kernels damaged by the corn bug. And Ukraine cannot provide this level. So, Algeria purchases wheat from the EU (mainly French, and some German).

Together with this, the other buyers allow Black Sea wheat with the 11.5% protein content and 2% level of kernels damaged by the corn, and the very good quality wheat is considered with the damage level within 0.4-0.6%.

On the other hand, there are no problems with Egypt and its requirements of the 0% of ergot in wheat, however, Ukraine does not have this problem.

 

In conclusion, I want to thank You for the informative conversation and to ask You to share with Your expectations of the further development of the situation on the Ukrainian export market?

We plan to continue developing our company. Especially that apart from the growing production and the export potential, these are stipulated by the improving business climate in Ukraine in recent years. The issues of the VAT refund for the export of the agriproducts improves too. It possible that everything develops not as quickly as wanted, but nevertheless, Ukraine is one of the key players on the global market.

We will continue our collaboration with the farmers in terms of which we try to meet their demand and restrict the risks. The partnership with us is the guaranteed distribution and express checkout. Moreover, we always try to offer the favorable price while putting all the possible issues concerning the delivery of the grain off the farmers. For that purpose, our company looks into the possibility to invest into the infrastructure and logistics. This issues were discussed on the recent meeting with the shareholders of Millcorp Grain Trading. But until now, it is rather in process and there are no decisions made.

Since the beginning of 2019/20 MY we have already purchased 170 thsd tonnes of milling wheat from agrarians for hryvnya in terms of EXW. By the end of the season, we plan to increases this volume to 300 thsd tonnes. Moreover, some part of the products we purchase from the large and small export-oriented companies of Ukraine in terms of CPT-port and FOB. Millcorp Grain Trading Black Sea continues to work in seaport of Black Sea and Azov Sea. The total amount of milling wheat we plant to export by the end of 2019/20 MY is nearly 700-750 thsd tonnes.

Herewith, we will continue to focus on the export of milling wheat to the Middle East and Morocco and to widen our presence on these markets. We see the prospects of the development in these markets thus in June of 2019 Millcorp Grain Trading has opened the office in Turkey.

 

Interviewed by Anna Tanskaya, APK-Inform Agency

 

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