July 15, 2011

 

Importers expected to limit reliance on cheap Russian wheat

 

 

Russia has aggressively undercut rivals to re-establish itself in global wheat export markets after an absence of almost a year, but key buyers such as Egypt are likely to spread their supply risks once the price gap narrows.

 

Exports from both Russia and its neighbour Ukraine are expected to rebound strongly in the 2011/12 season, as production recovers following last year's drought, the worst in decades.

 

Both Black Sea producers are looking to win back customers, but importers may be wary after being forced to scramble for alternative supplies after Russia imposed a ban on exports in August 2010.

 

Analysts said Russian wheat has been priced particularly aggressively this month as shippers look to move old crop grain out of silos ahead of the upcoming harvest and the price gap is likely to eventually narrow.

 

Estimates for the Russian harvest this year range to as high as 92 million tonnes of grain, although official estimates put the crop at 85 million, up from 61 million tonnes in 2010.

 

Egypt, the world's top importer of wheat, was initially reluctant to allow Russia, by far its most important supplier in the pre-drought 2009/10 season, to participate in tenders called by the main state buyer, but allowed them back last week and could not resist the low prices offered.

 

"Russia's presence with large quantities in the market this year will reduce prices and lead to bigger participation from the Russian side," said Nomani Nomani, vice chairman of Egypt's main state wheat buyer, GASC. "We are also very keen on having other origins take part but at more competitive prices."

 

France and the United States were Egypt's key suppliers in the 2010/11 season.

 

"Russian exporters need to re-establish their positions in their traditional markets," said Andrei Sizov Sr., chief executive and president of agricultural analysts SovEcon. "If not for the aggressiveness, Russia would not have won the Egyptian tender."

 

Macquarie analyst Alex Bos said major buyers would be reluctant to become too dependent on one supplier, and for buyers like Egypt risk mitigation is more important.

 

Food inflation and security are hot issues in many countries following tumult in the Arab world sparked in part by anger over food prices, which saw the president of Egypt toppled earlier this year.

 

Jordan last week became the first major buyer of Russian wheat since the end of an export ban on July 1, purchasing 150,000 tonnes. Egypt followed with 180,000 tonnes.

 

Ukraine, which is currently excluded from Egyptian tenders, has the potential to offer tough competition to Russia in some markets, undercutting Russia at a Lebanese tender in early June.

 

Nomani said GASC was also looking into including Ukraine and Romania into the list of origins under conditions that ensure the quality of their harvest, although some analysts did not expect Ukraine to be able to compete with Russia in markets which demand high quality grain.

 

Recent rains in the Ukraine are likely to result in the downgrading of a significant proportion of its crop to animal feed.

 

"Before (the rains) we expected a 60/40 breakdown between milling wheat and feed wheat. The latest data suggests a 50/50 breakdown," said UkrAgroConsult analyst Yelizaveta Malyshko. "I think it will worsen somewhat, probably to 40/60 (by the end of the harvesting campaign)."

 

"Ukraine may compete with Russia in Tunisia and in Bangladesh which require lower quality wheat. But the main destination of Ukrainian grain will be Southeast Asia, like the Philippines and South Korea," Sizov added.

 

Quality will also be the key for the EU's top wheat producer France, where a drop in exports is likely to be driven by lower supplies rather than increased competition, according to Alexandre Marie of French grain analysts Offre & Demande Agricole (ODA).

 

French farm office FranceAgriMer is projecting this year's soft wheat crop at 32 million tonnes, down 10.3% from a 2010 crop of 35.7 million, and the smallest since 2007.

 

ODA sees French wheat exports outside the EU at 7.3 million tonnes versus 13 million in the prior season.

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