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November 24, 2008

                                             
Russia sells wheat at low prices as US hopes for Brazil business
                                             

 

The Black Sea region should continue to beat the US for world wheat export business as traditional customers hunt for low prices, although the US could score some unexpected sales to Brazil due to production problems in Argentina.

 

Russia, in particular, has shown up the US by offering the most attractive prices in recent tenders from countries in North Africa and the Middle East. Egypt, Jordan and Syria said Thursday (November 20) they had all booked Russian wheat.

 

Egypt's state-owned wheat buyer, the General Authority for Supply Commodities, said it bought 30,000 tonnes of Russian wheat for US$160 a tonne, free on board. By contrast, the cheapest French wheat was offered at US$181 and the cheapest US soft red winter wheat was offered near US$182, according to a breakdown of bids.

 

"US wheat is just simply unattractive pricewise," said Terry Reilly, analyst for Citigroup.

 

Russia has "a little bit of an edge" quality-wise over other countries in the Black Sea region, such as Ukraine and Kazakhstan, Reilly said. The region in general has struggled with quality issues this year and produced more feed quality wheat than usual.

 

Exporters had indicated that Egypt was interested in buying some US or European wheat to blend with poor-quality Black Sea wheat, according to brokerage firm Tenco. However, Egypt was only willing to pay a US$5 premium for the European wheat, the firm said in a market comment.

 

Egyptian wheat buyers have "warned those at Black Sea ports very harshly to watch the quality secured for each vessel," Tenco said. Egypt hopes "the point hits home and as a result Black Sea wheat arrivals to Egypt will no longer be as large of a problem," the firm said.

 

Wheat exports from the Black Sea are expected to continue "at a healthy pace" due to cheap prices, an analyst said. Russia's government has said it plans to encourage grain sales by offering subsidies to exporters and by lowering railway and port handling tariffs.

 

Russia may be eager to push wheat out the door because it doesn't have enough facilities to store its bumper crop.

 

Russia is expected to produce a record 63 million tonnes of wheat in 2008-09, up from 49.4 million last year, and to export 14 million tonnes, up from 12.2 million last year, according to the US Department of Agriculture.

 

"Record production in Russia is expected to strain storage and handling capacity," the USDA said in its November supply and demand report.

 

There also are ideas Russia wants to sell its exportable surplus to avoid depressing domestic prices and to make a name for itself in the world wheat market, said Dale Durchholz, analyst for AgriVisor. Variable production has made it difficult for Russia to establish itself as a reliable exporter.

 

"It may be that they're trying to push some stuff out to get a toe-hold in the world trade, not just this year but for years to come," Durchholz said of the Russians.

 

Traders said they were surprised Egypt only purchased 30,000 tonnes of wheat in the tender. Officials probably kept the purchase small to see whether prices decline further in the coming weeks, analysts said.

 

Importers have the upper hand in the wheat market due to ample global supplies, and they may be cautious about making purchases due to the global economic downturn, Durchholz said. Nearby Chicago Board of Trade December wheat, a benchmark for world prices, has fallen 61.5 percent to about US$5 per bushel since hitting a high of US$13 in February and is down about 25 percent since October 1.

 

"In the economic environment that we're working within at this point, it's just a matter of, 'Where can I get something cheap?'" Durchholz said. "Quality doesn't seem to be as much of an issue as price today. I think that's because of the uncertain economic situation we're living in around the whole world."

 

Egypt will likely issue another tender for wheat next week to secure supplies before year-end and snap up more than 100,000 tonnes, Reilly said. US wheat probably won't be competitive enough to make major sales in upcoming Egyptian tenders, he said.

 

"They'll be back several times before the end of the year, securing supplies for the first quarter of the year," Reilly said about Egypt. "They'll be aggressive over the next few weeks, in my opinion."

 

The US could win some business from Brazil due to production problems in Argentina. Argentina typically supplies 96 percent of total Brazilian wheat imports but has suffered from dry weather and reduced plantings this year, according to AgResource Company.

 

Argentina's Agriculture Secretariat on Thursday cut its forecast for 2008-09 wheat production to 10.1 million tonnes, down from 16 million tonnes last year. The USDA last week projected Argentina would produce 11 million tonnes and export 5.8 million, down from the 10.5 million exported last year.

 

The USDA will likely ratchet down its export estimate again in the coming months, Reilly said. The agency's current export projection would represent the smallest share of production exported by Argentina since 1995, according to AgResource.

 

"A minimal 1.43 million tonnes exportable wheat supply deficit has been created by Argentina's shortfall versus Brazil's import needs," AgResource said in a research note. "With quality and freight rate advantages, the US is ideally positioned to fill this void."

 

Brazil used to be a big buyer of US wheat until several South American countries formed a regional trade agreement, known as Mercosur that allowed grain to move between the countries duty-free. US export prospects "will look a little bit brighter" if Brazil suspends its import tax, Reilly said.

 

"Until that happens, US export prospects look bleak," he said.

 

The steep decline in Argentina's production and export potential has occurred despite a major increase in total world wheat production. The world is expected to produce a record 682 million tonnes of wheat after high prices prompted producers to expand plantings in many areas.
                                                                                           

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