The beginning of 2020 was rich with events in Ukraine and other countries, which are not the least players in the global commodity trade. The US-China Phase 1 trade deal, fires in Australia, escalation in Middle East, Russian government’s decision to restrict wheat export and of course the “soybean” amendments in Ukraine were the most famous. Despite the fact that the market is used to function in terms of the saturated informative space, the number of the news in January 2020 is staggering.
Did all these influence the market, what factors should be considered, where the product will shift from the Middle East, and what should we expect in the near-term perspective?
These and other questions APK-Inform Agency asked the Business Development Manager at Maxigrain S.A., grain market analyst, Elena Neroba.
— Elena, how would You characterize the long-expected agreement between China and the USA?
Suffice it to say, the market was completely blown.
The agreement speculated by Trump for a year did not favor the market. On January 15, in the White House the US and China signed the Phase 1 agreement. The details of the agreement were kept in a secret to the last and kept the prices high in anticipation. But the figures states in a document have risen questions in terms of their realization. In particular, China is to make $12.5 billion worth purchases of agriproducts from the US in 2020 which is higher than in 2017, and in 2021 — they should run $19.5 billion per year. And this is about not the simple purchase but includes the import of the goods to China.
It should be good but there are questions.
First, the trade agreement does not specify the volumes of the different products. And the logic of the choice if the “basic” (2017) year is not clear: it was not successful form many products nether in terms of volumes exported to China, not prices. It was simply the last calendar year before the dispute. If we look at 2017 and the export of corn, China was not among the top-ten largest importers of this grain and it bought nearly 1.5 thsd tonnes of wheat. The same situation could be observed in terms of other agriproducts: the peaking years disagree with the most profitable and are far from the basic level. Today soybeans and pork are the main goods of high interest to China. The prices of soybeans today are lower than in 2017, and for pork are almost the same. The export of soybeans in 2017 totaled 31.37 mln tonnes and pork — 2.4 mln tonnes. And in terms of value the recovery of the export to these levels at today’s prices will bring hardly $15 billion.
Second, the Chinese officials states that the purchases will be conducted under market conditions and the third parties will not be affected, which is rather a disturbing statement. It seems that Chinese side has successfully “slowed down” the negotiations of the phase 1 and now is just waiting for the record Brazilian crop of soybeans.
Third, there are concerns in terms of the Chinese ports ability to process the drastically increased incoming volumes.
And the forth issues, which puts into questions the usefulness of this agreement — is the fact that the tariffs implemented are not going to be lowered and will continue to be the instrument of manipulations, perhaps until the elections in the US.
JCIChina tried to make a model of the annual import by China from the US, but this picture goes against stated above.
— The fires in Australia were also one of the most discussed topics. How the losses and the insurance claims can influence the position of the country on the global market?
The Australian bank Westpac estimates the direct losses due to forest fires at $3.5 billion. Most of the producers had not insurance and thus count on the government support.
Rabobank believes that the fires damaged 6 mln ha of land but the estimates of the degree of impact on agriculture are too soon to give. Today it is clear that the livestock and daity production bore the main losses.
The ABARES December report does not include the fires influence. It forecasted that in 2019/20 MY the production of winter crops to decline by 3% to 29.4 mln tonnes, which is 13% lower compared to September forecasts, which also nearly 27% lower than the 10-year average level. According to the report, the production of wheat to decline by 8% to 15.9 mln tonnes which is 35% lower than 10-year average. FCStone lowered its forecasts to 14.5 mln tonnes. The production of barley was expected to increase 4% to 8.7 mln tonnes, but it still is 3% lower than the average.
— The beginning of 2020 was clouded by the escalation of the conflict in Iran. What can You say about it?
The rapidly developing conflict with Iran supported the crude oil market at first. But the de-escalation of the conflict had eased it.
The geopolitical events on Middle East definitely can influence the grain market. In 2019/20 MY the total volume of grain import to Iran is forecasted at 13.3 mln tonnes, according to IGC, compared to 12.5 mln tonnes last season. Mainly the country imports corn: 9.8 mln tonnes, which includes 5.5 mln tonnes of Brazilian origin. The import of barley is expected at 3.2 mln tonnes. The forecasts of soybeans and soybean meal are the same of last year. After the president of Brazil Bolsonaro supported the position of the US president Donald Trump, Iran declared to stop buying Brazilian corn. Today there are only several countries supplying the grain to Iran. Fir example, Russian since the start of the current MY exported more than 0.7 mln tonnes of corn, 0.5 mln tonnes of barley and nearly 130 thsd tonnes of wheat. Ukraine since the beginning of the season exported more than 1 mln tonnes of corn, 500 thsd tonnes of barley and 100 thsd tonnes of soybeans. Of course, the US sanctions challenge the deliveries to Iran: few banks agree to accept payments from the Iranian companies. Russian could partially meet the demand of Iran, but on several goods. Turkey also can re-export. It is interesting to mention, that Iran increased the import shortly before the dispute escalation.
— In the first half of 2019/20 MY, Ukraine exported more than 0.5 mln tonnes of barley and corn to Iran (and barley for the first time). How will the military conflict influence the trade with this country and the Middle East in general?
In this case, we should look at the numbers (the data provided by AgroChart line-up, in February and January the figures can be corrected).
As we can see, the selling of corn from Ukraine to Iran started only in the beginning of last season and continued until the end of 2019, and now there is a slow-down of the trade. If last MY the share of Iran in total export of corn from Ukraine totaled 3%, in the current season this share increased to 7%. It is possible that it can continue increasing provided the absence of the contract payments difficulties. Also, Egypt increased the purchases of Ukrainian grain.
Ukraine does not supply wheat to Iran, and due to the price advantage and the increased export potential, widened its presence on the Egyptian market, especially in terms of state agency purchases.
If we speak about barley, in the current MY the export potential is nearly exhausted. In the first half of the season, the exports totaled 3.88 mln tonnes out of the 4.55 mln tonnes forecasted. Today, the demand is in place. For example, Saudi Arabia actively tries to purchase large volumes of the grain.
In any case, Iran will form the stocks should the dispute escalate.
— How can the export flows change? Towards North Africa, Egypt particularly?
North Africa is a tough competitor of Middle East for Ukrainian grain. The selling dynamics is good and the trade relations strengthen. In terms of wheat, the competition stays in place as the export potential of Black Sea wheat is exhausting faster than expected, and the demand grows. This situation was stimulated by the developments in exporting countries. The reduction of the production in Argentina and Australia, the deficit of soft wheat in Pakistan, Russian wheat regulations lead to price rise. India expects to increase the production and the country might increase the state stocks of the grain. Even Egypt is interested in Indian wheat, but it is mostly the market fantasies because the Indian grain is not competitive on the North Africa market without the state support. As we said before, Iran wants turn down Brazilian corn. On one hand, Brazil declared the increase of ethanol production from corn, on the other hand the sanctions can sophisticate the delivery.
— If we talk about the main competitors, we cannot leave out the discussion the news about Russia aiming to restrict the export of wheat, which has stricken the market right after New Year. How can this influence the market operations, it can?
Non-tariff regulation of the market is a favorite bureaucrat instrument. The impossibility to implement the taxes, as Argentina did, was not an obstacle for Russian government to come up with new initiative, which supported the wheat prices. Now, apart from the Rosselkhoznadzor the export quota can become a sword of Damocles for the exporters. In general, the local agree that the goal is not achievable. The total export of the grain, under the quota offered, is forecasted at 45 mln tonnes, 25 mln tonnes of which have already been sold, so there is nothing to be beware of. But according to Elena Tyurina the director of the information-analysis department of the Grain Union of Russia, the potential of the Russian grain export in the SH of 2019/20 MY amounts to 22.7 mln tonnes, which is slightly contrasts with the majority of Russian market players. I suppose that the difference may be caused by the fact that the quota does not include the countries members of the Customs Union. Moreover, it is important that the Russian official statistics does not show the deliveries, apart from Kazakhstan, to Venezuela, Syria and Iran. This fact is confirmed by the figures provided by Igor Pavenskiy, the head of the analytics center “Rusagrotrans”. It is interesting to note that Russia also tries to rearrange the deliveries of wheat to Iraq. But is not clear how Russia is going to compete with French wheat on Algeria. Anyway, the officials’ actions added to the rush and nervousness to the market, already saturated with the tenders, potential decline of the global production and the local problems, such as transport strikes. The sellers, who concluded contracts to deliver French wheat to North Africa have to fulfill the contract using German, Baltic or Polish grain. And if we almost clarified the global production this season, he next season can surprise us: in the US and France the sowing areas under winter crops are record low, the Black Sea region suffers from the low precipitation and the abnormally warm weather which leads to the shift of the development cycles, pest contamination and diseases. So the market “mood” is influenced by the weather — classic beginning of the season.
— In conclusion, returning to the Ukrainian features, please share a few words about the land market and the cancel of the “soybean amendments”.
The conditions of the land market launch in Ukraine continue to be a target for discussion, whereas the “soybean amendments” have been canceled. The deputies have again made even the competition between the processors of soybeans and rapeseed with and the traders thus returned the producers the full ability of a choice. This will create the competition between the domestic market and the exporters but next season: today the potential of these oilseeds have been nearly exhausted. The farmers’ best trump card — swing areas — did not work with the rapeseed, the area under which was not decreased. But in terms of soybeans the producers could have disrupt the agenda of Ukraine to lift the production of soybeans. Partially, this can be explained by the external conjuncture: due to the declined of the production because of the stable demand of the EU on rapeseed the prices were attractive, compared to the soybean global market. That is why the absence of the ability to refund the VAT during the export by the non-producers did not change the market much. Nevertheless, the norm will be annulated as per the market participants wish. But whether the exporters are able to offer the prices attractive for the farmers is a question of time and it depends mostly on Chinese pigs, then on Ukrainian tax agency.
Interviewed by Anna Tanskaya, APK-Inform Agency
You can speak directly with the representatives of Maxigrain company and other Ukrainian and Russian exporters, representatives of the key importing countries and global experts on International Conference Middle East Grain&Oils Congress on March 3, 2020, in Cairo, hotel Hilton Cairo Heliopolis Hotel, 5*.