April 7, 2004
Ukraine Seen Exporting 1.5 Million MT Wheat In 2004/05
Ukraine is expected to export an estimated 1.5 million metric tons of wheat in MY 2004/05 following on the heels of the worst grain crop on record, according to information from the U.S. Department of Agriculture's Foreign Agricultural Service web site.
The forecast increase in wheat, barley and rye area and yield is expected to offset the anticipated reduction in corn and oat production in 2004. Low winter wheat damage in 2003/2004, sufficient soil moisture, early sowing of spring grains, improved maintenance of agricultural machinery and increased availability of mineral fertilizer have all led to a more favorable initial grain production forecast as compared with last year. MY 2004/2005 consumption of wheat, barley and rye is expected to increase, in line with the rise in production. However, due to the sharp reduction in livestock inventories in 2003-2004, feed demand is not expected to return to MY 2002/2003 levels.
Following on the heels of the worst grain crop on record, MY 2004/2005 should be a year of recovery for Ukraine's wheat stocks and consumption. The anticipated production level should also ensure that Ukraine will return to the status of net wheat exporter with estimated wheat exports at 1.5 million MT. Barley exports are also expected to increase and will likely be unaffected by Government of Ukraine purchases. Unlike wheat and barley exports, corn trade in MY 2004/2005 is forecast to decline to MY 2002/2003. Corn trade volumes will be dependent upon the quality of exportable supplies. High quality rice will likely remain the only cereal grain exported from the United States to Ukraine in MY 2004/2005.
Grain and pulse production in 2004 is anticipated to increase by 40% as compared with 20.2 million MT produced in 2003 - Ukraine's worst grain crop on record. Wheat, barley and rye output is expected to expand as compared with the previous year but will remain below the respective crop's 2002 production level.
Production in 2004 is forecast to rebound thanks to low winterkill in 2003/2004 and despite reduced plantings of winter wheat in Fall 2003 as compared with the previous year.
Most of the territory of Ukraine experienced a relatively mild winter with adequate protective snow cover. This facilitated better-than-average survival of winter grains and significantly improved soil moisture conditions. Post's wheat production forecast assumes 5% winterkill (versus 64% winterkill last year), the report said. Additional spring wheat will be planted on 500,000 hectares previously sown to winter wheat.
Farmers reduced winter wheat plantings intended for grain to 5.5 million hectares compared with 6.7 million hectares planted in Fall 2002. This was due to dry weather conditions at the time of planting in Fall 2003 and scarcity of winter wheat seed due to a disastrous grain harvest. Another factor in the overall reduction in 2003 winter wheat area planted was the significant increase in sunflowerseed and corn plantings that were still in the field during the winter wheat August-September sowing period. According to official estimates, the total area under corn (usually harvested in September-October) and sunflower seed (usually harvested in August-September) increased by 1.8 million hectares over the previous year to 6.1 million hectares.
Favorable weather conditions in early-to-mid March 2004 allowed spring grain sowing to begin at least one to two weeks earlier this year in all regions. Barley remains the major spring cereal crop in Ukraine. According to the Ministry of Agricultural Policy of Ukraine, farmers planted 1.7 million hectares to spring grains (chiefly spring barley) and pulses as of March 25, 2004. Only 50,000 hectares were planted by the same date last year.
The official GOU forecast of area planted to spring barley in 2003 is 3.5 million hectares. This is in addition to the 534,000 hectares of spring barley planted in Fall 2003. Farmers generally have sufficient resources to plant as much spring barley as forecasted by the GOU. However, high quality barley seed is in short supply.
Planting prospects for 2004 remain unclear at this point. The GOU expects 2003 corn area to remain similar to the previous year. On closer inspection, however, it is doubtful that farmers will plant as much corn as in 2002. The lower winterkill significantly reduced area available for spring resowing. Therefore, Post's initial forecast assumes less area under corn than the GOU forecast.
Following last year's extensive winterkill, farmers increased area sown to winter rye in Fall 2003 to 778,000 hectares, an annual increase of 28%. This is attributed to rye's greater cold resistance as compared with winter wheat and barley, making it the safer choice. While rye production in 2004 is forecast to increase over the previous year, it will likely remain below 2002 production due to lower yields and expectations of normal weather, the report said. Post adjusted the estimates of grain and pulse production in 2003 to match the finals released by the State Statistics Committee of Ukraine in late February 2004.
Assessing Ukraine's food and feed grain consumption remains a challenging task with many unknowns. The GOU does not publish individual estimates of utilization for wheat, barley, corn or any other cereal grain. Overall grain consumption in MY 2004/2005 is forecast to rise based on expectations of lower grain prices that should stimulate both human and feed consumption in MY 2004/2005. However, a declining human population coupled with a rapid reduction in livestock inventories in recent months indicates that neither human grain consumption nor cereal feed utilization in MY 2004/2005 will recover to MY 2002/2003 levels.
A State Statistics Committee of Ukraine survey of household purchases of bread, pasta, flour, pastry and confectionary products determined total CY 2002 wheat consumption at 5 million MT in wheat equivalent. Unfortunately, the survey did not account for on-farm consumption by rural private households. Post increased the feed wheat consumption estimate for MY 2002/2003 and MY 2003/2004 based on the relatively low estimate of human consumption derived from the survey mentioned above, the report said.
Lower anticipated wheat prices in MY 2004/2005 over the current marketing year should allow feed wheat consumption to recover from its lowest level ever in MY 2003/2004. While feed wheat is expected to partially replace corn in feed rations during MY 2004/2005, it will remain the third most important feed grain in Ukraine after barley and corn.
Assuming normal weather conditions in 2004, barley consumption for malting purposes is forecast to increase in MY 2004/2005 due to steadily increasing demand for malt from the brewing industry and new private investment in the domestic malting industry. Post estimates that barley consumption for malting purposes will increase from 250,000 MT this marketing year to 315,000 MT in MY 2004/2005. This reflects a single year rise in malting barley's share of total barley domestic utilization from 4% to 5%. Official Ukrainian statistics report that domestic malt production increased to 185,000 MT from 171,000 MT produced in CY 2002. Imports of non-roasted malt (HS 110710) rose from 40,000 MT to 51,000 MT. The import duty for malt is quite high at 30%, encouraging domestic production.
The major constraint for domestic malt production is low quality. For 2003, barley quality was lower than for the previous year and failed to meet quality expectations of the Ukrainian malt producers. According to APK-Inform, 70% of barley produced in 2003 had protein content higher than 12.5%, too high for malt production. Malt producers require a maximum of 11.5% protein.
While the MY 2004/2005 export season should be a "recovery" year for consumption and stocks, exports of wheat and barley are anticipated to rise with increased production.
The wheat export forecast for MY 2004/2005 assumes that the GOU will be active in purchasing grain to both replenish stocks and create an intervention fund as mandated by legislation. Barley exports should continue unhampered by government purchases. Post will revise the current wheat export forecast upward if there is no evidence of active government purchases in MY 2004/2005.
Wheat imports in MY 2003/2004
Trade sources within Ukraine confirmed a purchase by Ukrainian grain traders of 57,000 MT of U.S. Hard Red Winter Wheat and 16,000 MT of Argentine wheat in March 2003. The buyers of both shipments have tried to resell this wheat to third countries because of recently flattened domestic prices. They have had no success to date. Romania, Moldova and, surprisingly, Russia have been mentioned as possible destinations. If the U.S. shipment does arrive in Ukraine, it will be the first commercial sale of wheat to this Former Soviet Republic since gaining independence in 1991.
Wheat and wheat flour imports in July 2004-February 2004 totaled 3.2 million MT (in wheat equivalent) with Kazakhstan and Russia being the major suppliers. Considering the expected wheat arrivals mentioned above, outstanding import commitments and the resumption of VAT payments via promissory notes, Post has increased the estimate of wheat imports in MY 2003/2004 by 200,000 MT.
The estimate of wheat exports in the current marketing year was reduced due to the lack of recorded exports.
The estimate of barley exports in MY 2003/2004 has been increased to reflect the export pace to date. Barley exports totaled 1.2 million MT in July 2003-March 2004 while Ukraine's commodity exchanges registered export contracts for an additional 300,000 MT.
Grain Export Infrastructure Improvements
Lower production in the Black Sea region during CY 2003 resulted in a sharp reduction in the volume of grain handled at Ukrainian ports. The cumulative export, import and transit of grains dropped from 12.5 million MT in CY 2002 to 6.6 million MT in CY 2003 (Grain Handling by the Ukrainian Ports in 2003). Private investors continue to improve grain export infrastructure. It has been estimated by Post that Ukraine's maximum port export capacity has increased to 2.2 million MT per month compared with 1.7 million MT one year ago.
In February 2004, an investor from Cyprus completed construction of a new grain export terminal in Sevastopil, a deep-water port located in Southern Crimea. The terminal has 10 silos with each capable of storing 10,000 MT of grain. A grain export terminal with the capacity to store up to 20,000 MT and load vessels of up to 12,000 MT recently opened at the Kerch Fish Port.
Due to its geographic location, Ukraine has been an important transit point for grains exported from Russia, Kazakhstan and Moldova. With this report, Post is providing data on grain transit via Ukrainian Ports.
As Ukraine's own exports declined in January-March 2003, wheat and barley transiting from Kazakhstan and Russia became more important for the continued operation of Ukraine's port elevators and railroads. To encourage grain transit, Ukrainian Railways reportedly lowered tariffs for transiting grain in July-December 2003 by 39%.
The GOU declared its intentions to purchase 2.5-3.0 million MT of grain (mostly wheat) produced in 2004 to use for future interventions. Under this proposed scheme, the State Committee of Ukraine for the State Material Reserves (Derzhreserve) would be required to purchase 1.0-1.5 million MT while Khlib Ukrainy and the regional governments would be required to purchase 500,000 and one million MT, respectively. It is doubtful that this proposal will fully materialize due to existing budget constraints. Nevertheless, Post has assumed an increase in government-held MY 2004/2005 wheat ending stocks.
In 2003, the GOU started to publish estimates of grain stocks. PSD estimates of rye and rice ending stocks for MY 2002/2003 and 2003/2004 were increased to levels in excess of GOU official estimates. This is because the GOU estimate does not account for grain held by small farmers. It is also not clear how the GOU estimate accounts for strategic and intervention stocks held by Derzhreserve. Ukrainian legislation makes no clear distinction between strategic stocks, which is de-facto classified information, and intervention stocks, which should be public knowledge. The estimate for MY 2003/2004 wheat ending stocks was increased to account for high stocks reported by government sources as of March 1, expected monthly consumption levels for the remainder of the marketing year and outstanding import obligations.
The GOU is required by law to announce the "pledge" price for grain1 by March 31 of each year. As of April 1, 2004, the price under which the GOU will conduct pledge purchases in MY 2004/2005 has not been announced. This price support mechanism has never been used effectively because the GOU has failed to offer farmers a competitive price. For example, the price offered to farmers in July-August 2003 under pledge purchases for wheat was UAH 605/MT ($113/MT) while the market price was at least 50% higher. It is uncertain whether pledge purchases will be effective in supporting farm gate prices in MY 2004/2005. Most likely, the GOU will conduct direct purchases of wheat at market prices following the harvest.
Flour interventions from Derzhreserve have been the main force behind stable domestic wheat prices. According to various sources, Derzhreserve sold 35,000 MT of wheat flour in January-February 2004 to stabilize prices and was prepared to sell an additional 35,000 tons.
The State Reserves Committee prefers to utilize its own milling capacity to produce and sell flour rather than sell wheat directly from stocks.
Partial compensation of mineral fertilizer cost is a new policy measure aimed to support farmers in CY 2004. The GOU expects to spend UAH 140 million ($26 million) to compensate farmers up to 18% of the fixed price set at UAH 550 per 1 MT for ammonium nitrate and UAH 690 per 1 MT of urea. This measure will help Ukrainian farmers to increase the application of mineral fertilizers in 2004 as compared with previous years.
2003 Disaster Payments
Ukrainian farmers faced serious losses in 2003 due to unprecedented winterkill and the absence of an effective crop insurance program. In order to partially compensate grain farmers for their losses, the GOU provided UAH 20 million ($3.7 million) in April 2003 and UAH 356 million ($70 million) in June 2003. Post estimates that disaster payments averaged UAH 70 per hectare ($13/ha) and compensated for about 30% of production cost losses, the report said.
Subsidy For Winter Grains Planted In 2003
Since Ukraine's Parliament authorized disaster payments for the entire CY 2003, the GOU decided to provide the remaining authorized UAH 360 million ($68 million) as a subsidy to those farmers who planted winter grains in Fall 2003. Figuring that Ukrainian farmers planted 7.1 million hectares with winter grains in 2004, the subsidy equaled UAH 51/ha ($10/ha).