November 4, 2011
Black Sea wheat export creates intense competition
Black Sea wheat producers will flood markets for the whole of 2011/12 crop year with high volumes of cheap grain, creating intense competition among top exporters such as Russia, Ukraine and Kazakhstan.
Massive Black Sea exports were pressuring European wheat shipments, their main competitor, but, traders noted that exports held up better than expected in the early part of the season due to resilient demand for European grain from its traditional importers.
Whether Europe retains these buyers in North and West Africa or cedes them to cheap Black Sea wheat as it has in the top wheat market, Egypt will depend on its capacity to compete on price with the onslaught from Russia, Ukraine and Kazakhstan.
Black Sea wheat has also priced the US, the world's top exporter of the grain, out of some markets, with US wheat currently not even bid in Egypt's tenders, even if Argentina has emerged a potential competitor in recent tenders.
Russia, which was first out of the gate among Black Sea producers this year after the lifting of an export ban imposed last year during a catastrophic drought is set to keep up its onslaught.
The next few months are likely to see high shipments from Russia, though they will ease after regular monthly records since the export ban ended on July 1.
In September, Russian wheat exports reached a fresh high of 3.3 million tonnes, shipped mainly to Egypt and other North African countries. The previous monthly records were set in August and July at 2.9-2.4 million tonnes.
"Record exports are the result of continued demand for Russian grain, which remains cheaper than the main competitors'," Andrei Sizov Sr, President and CEO of SovEcon agricultural analysts, said.
Russia expects crop of 90-92 million tonnes of grain, including 52 million tonnes of wheat this year after a severe draught last year has cut its grain output by a third to 61 million. Wheat crop fell to 41 million tonnes from 62 million.
Its exportable grain surplus is estimated at 30 million tonnes in 2001/12, but it will be able to export no more than 25 million tonnes because of infrastructure constraints, according to the country's main grain lobby, the Russian Grain Union.
Wheat constitutes the bulk of Russian grain exports, the rest of which is mainly barley. The government plans to cap exports with a floating tariff if they exceed 24-25 million tonnes. But even this volume will be a record for Russia.
SovEcon expects the country to export 2.9 million tonnes in October, but in November and December shipments they will start to peter out.
Export volumes traditionally fall in Russia closer to the end of the calendar year as a significant part of shipments are executed by small vessels through rivers, which freeze in winter. Storms are frequent in winter at its main export ports.
Unlike Russia, Ukraine, which plans to harvest up to 53 million tonnes of grain in 2011 and to export about 27 million tonne in 2011/12, is expected to raise shipments volumes in the coming months.
It has exported only 3.84 million tonnes of grain so far this season against 4.8 million in the same period a season earlier. The decline has forced Kiev to cancel grain export duties, imposed in July.
Mykola Vernitsky, director of ProAgro think tank, believes that Ukraine may export 8-9 million tonnes of wheat in 2011/12.
"We have been late with our wheat, as substantial volumes traditionally contracted at the start of the season, have been taken by Russia," he told Reuters.
"But for us it is not a tragedy. Wheat prices are traditionally higher in the second half of the season, when Russia will have its stocks sold and will be threatening everybody with export duties."
Vernitsky said Ukraine will keep lowering export prices in order to outrun European producers. "We still have a reserve of resistance."
Russian grain lost a tender with its main buyer, Egypt, last week, at which 120,000 tonnes of Ukrainian wheat were bought at USUS$247.92-249.30. Russian wheat was offered at higher prices of USUS$256.45-265.98 at the tender.
However, both countries shared the following tender on November 1, as Russian traders lowered prices.
European traders appeared worried by Ukraine's accelerating exports.
"We can see Ukraine starting to dominate the export space, whether in corn or wheat," a dealer said. "The key thing is that we don't start losing business in our usual markets like Algeria, Morocco and West Africa."
The balance of power on these competitive markets will depend on whether the Europeans will be able to offer their grain at competitive prices.
"By January-February Russia will exhaust its stocks of high quality grain, which then may be found in Kazakhstan," Nurlan Mukhamedzhanov, deputy head of Kazagromarketing, an arm of the state agricultural holding, KazAgro, told Reuters.
Kazakhstan, which officially expects a crop of at least 22-23 million tonnes of grain mainly wheat, can potentially export more than 15 million tonnes this season if it finds enough railway wagons to carry grain to ports.
The Kazakh government is paying a USUS$40 per tonne subsidy on rail shipments to Black Sea and Baltic Sea ports up to a total volume of 2.5 million tonnes in the 2011/12 marketing year.
Yevgeny Aman, executive secretary at the Agriculture Ministry, said he believed Kazakh grain could potentially emulate its achievements of five seasons ago, when it was exported to more than 60 countries.
"We will have up to three million tonnes that will be competitive with Russian and Ukrainian grain in the Black Sea. From there, it could reach any point in the world like North Africa, the Middle East," he said. "And our grain is of higher quality."