AGRI Column - issue 40/2022

This week’s market report provides information on:

ROMANIA. EXPORT-IMPORT BALANCE

WHEAT MARKET

BARLEY MARKET

CORN MARKET

RAPESEED MARKET

SFS MARKET

SOYBEAN MARKET

CONSTANȚA LINE-UP

EUR-USD PARITY

FOSSIL ENERGY

WEATHER FORECAST

ROMANIA. EXPORT-IMPORT BALANCE

LOCAL STATUS

Milling wheat price indications followed a downward path, based on Euronext developments. The established formula DEC22 minus 16-17 EUR/MT formed the basis of the price offers in the CPT Constanța parity. In other words, the price of 325-327 EUR/MT is a negotiation basis for the sale of goods. The discount for the feed quality is kept at the same level of minus 25 EUR/MT compared to the main quality (milling). It’s a very high level of discount, but it has reverberations from other areas of the world where the potential for low-quality harvests is growing stronger by the day.

The domestic market is also particularly active these days. We note indications of 335 EUR/MT FCA Farms for very good quality, implicitly protein over 12% and a test wieght over 80 kg/hl.

CAUSES AND EFFECTS

At least a week from now we shouldn’t see much movement in the market. The main reason is the regional concern for the Middle East tenders. And their suite is completed by demand from Asia, more precisely Pakistan. The polarization of interest in local wheat will manifest itself, but the price regime will not know higher values than what is being traded these days.

And this decrease parameterized by Euronext makes the Romanian wheat competitive in the regional transactions. An illustrative example is an attempt by Egypt to buy directly that did not materialize. There, Romanian wheat indicated better values by 4 USD/MT for CIF Egypt deliveries, compared to the number 1 competitor in the basin, Russia. Comparatively, however, in FOB parity, Russian wheat was much cheaper. The difference that created an advantage for Romanian wheat was generated by Romanian logistics, which implied lower costs by 20-30 USD/MT. Once again, Romania indicates iron health and predictability in the Black Sea basin. Unfortunately, the sale has not yet materialized and the parties are still debating.

REGIONAL STATUS

RUSSIA becomes particularly competitive and the month of October positions it at an extremely high export level of around 4.5 million tons. The discounts applied and its “friendly” destinations favor it in this whole. TMO’s last tender channeled around 500,000 tons of Russian wheat at 295 USD/MT FOB parity. Of course, there is still a long way to go before the expected export norm is met. The values of 47.5-50 million tons are still far away. So far, we have values of approximately 14.5 million tons in the Russian export basket.

Another favorite destination of Russia is Iran. Through traffic on the Caspian Sea, Russia will generate 5 million tons of export level to this destination. And as payment, Iran will generate drones and missiles to Russia. These tools of war are cheap and aid the Russian war machine in its attempts to systematically destroy Ukraine’s energy infrastructure.

With many promising destinations already in its portfolio, Russia is changing the export tax. The MOEX (Moscow Stock Exchange) index is up at 310 USD/MT and the fee rises to 49 USD/MT for this week starting Wednesday, to be precise.

At the level of carry-over, i.e. extra goods accumulated from the rest of the past crop and surplus of the current crop, Russia has a surplus of 25 million tons. This coupled with problems in sowing times and farmers’ reluctance to see the profitability of the wheat crop lead to an estimate of the future harvest volume of only 82-84 million tons (summer 2023). Thus, Russia loses about 0.7-0.9 million hectares intended for sowing with wheat in the fall of 2022 and summarizes the sowing at the level of 18.8 million hectares.

UKRAINE also develops sales of wheat. With a completed harvest and a March-October wheat export level of around 5 million tons, we believe that they did exceptionally well under the given conditions, with a Russian invasion of the wheat-predominant territories.

UKRAINE EXPORT CHART. MARCH-OCTOBER 2022

EUROPEAN UNION is still in full sowing season, and in the next issue we will present the data from each member country in terms of hectares sown in the autumn of 2022.

EURONEXT MLZ22 DEC22 –342 EUR (+3.25 EUR)

WHEAT TREND CHART – MLZ22 DEC22

GLOBAL STATUS

CANADA closes harvest with the estimated level of 35 million tons

The US is having particular problems with winter wheat, as they call it, because of the drought. The most affected area is Kansas, where wheat has an extremely high share. The development of the drought phenomenon is progressing and dark clouds are already being announced for the American wheat season of 2023. La Nina is once again a merciless arbiter, penalizing the world’s food in characteristic style. With planting about half complete, the 2023 US SRW winter wheat crop is already affected by drought in the central Southern Plains.

Seeding plans could be scaled back in the US despite high prices. The drought threatens Kansas, the top winter wheat growing state, and Oklahoma in two ways: it discourages farmers who haven’t yet seeded to try, while it threatens already-sown crops to develop properly.

“It’s kind of a bleak situation,” said Kent Winter, who farms in Andale, Kansas, outside Wichita. He said he normally plants by mid-October but has yet to plant wheat this year.

If there is no rain in the next 10 days, the crop will begin to decay.

MidWest US drought graph – black line indicates 2022. Via Karen Braun

ARGENTINA declines further in terms of wheat harvest volumes. The latest indication is only 15 million tons, compared to 16 million the previous one. And the degradation will continue, for sure.

AUSTRALIA is experiencing rainfall issues and New South Wales is a telling example of this. The quality of Australian wheat is clearly degraded, even though volumes will perhaps exceed 33 million tons. But incessant rainfall also jeopardizes the harvest season by delaying it, which will favor mold and sprouting in the field.

IRAK generates a demand of 5 million tons of wheat. Much of it will certainly be an American affair, for already Russian wheat is completely excluded.

PAKISTAN in turn generates demand of 500,000 tons through a tender.

SAUDI ARABIA also enters the game and generates demand for 535,000 tons of wheat. But appearances also lead to a Russian origin, taking into account its OPEC+ partnership with this origin.

INDIA, which claims the sufficiency of domestic wheat stocks, has just purchased a batch of 50,000 tons of wheat from Australia, a sign that things are not exactly as they say. And it should be so, if we remember the killer heat wave that destroyed much of India’s wheat crop.

JORDAN sees its strategy and has purchased a batch of 60,000 tons of Romanian origin at the level of 374 USD/MT in CIF Aqaba parity for delivery in March 2023, after two unsuccessful purchase attempts.

CBOT ZWZ22 DEC22 – 850 c/bu (+1 c/bu)

WHEAT TREND CHART – ZWZ22 DEC22

WHEAT PRICE INDICATIONS IN MAIN ORIGINS

CAUSES AND EFFECTS

BLACK SEA BASIN

The Black Sea basin begins to boil, in the context in which the sabotage of the green corridor by Russia is extremely visible. The delay and lack of interest in carrying out inspections at the Bosphorus entry level for Ukrainian goods from the Humanitarian Corridor creates delays of 23-25 days from the moment of shipment by Ukraine through the created corridor to the crossing of the Bosphorus. Thus, we have clusters of ships that are actually anchored or drifting near the Bosphorus channel. Their number is already 160-170.

Russian inspectors generate only 6-7 inspections per day, which seriously damages shipping convoys. Shipowners are already no longer interested in sending ships to Odessa-Chornomorsk-Pivnyi. Every day we are getting closer to the expiration of the 120 days and we may see no more ships calling at the three ports starting November 1, 2022. The loading time and extremely long inspection time will lead to exceeding on November 22, the deadline for the green corridor. And until this moment, we have no certainty that this Istanbul Agreement will be extended, and in this case, no one will risk sending ships that will be arrested in the three ports by conducting a blockade by the Russian navy.

Moreover, the accusations flow from the Russian side, starting with the absolutely absurd hypothesis that the explosive that detonated the bridge over the Kerch Strait would have been trafficked on a ship from the green corridor, passing over those related to the destinations of goods leaving Ukraine and reaching those related of the fact that the explosion at the bridge in Kerchi endangered the Russian green corridor.

Let’s take them one by one and explore them, as analysis is necessary at this point:

The explosion of the bridge over the Kerch Strait. The allegation that the origin of the explosive is from a ship in the corridor is completely absurd. We don’t think there was a need for a ship to bring the explosives to Odessa. Ukraine has enough explosives from other sources. There was no need for someone to bring them in a ship from the humanitarian convoys.
Destinations of goods. These are varied and indeed do not favor poor countries. But if we look at Turkey, we will see that it is a major beneficiary. Therefore, Russia should not generate such accusations, given its close relations with Turkey, which will also generate a gas distribution hub in the future.
The explosion in Kerchi endangered the Russian green corridor. We would simply ask: which Russian green corridor? No one knows what Russia signed with the UN and Turkey in Istanbul in July. Which Russian Green Corridor? This statement is completely absurd.

THE AGGLOMERATION OF THE BOSPHORUS. Bottom left. Source: marinetraffic.com

As a summary of these multiple causes, we would say the following:

Russia must sell wheat and fertilizers.
Russia has no sanctions on the export of wheat and fertilizers.
Russia, on the other hand, has sanctions targeting bank transfers, being disconnected from payment systems.
Russia also has sanctions imposed on the oligarchs who own the large fertilizer production complexes, and they cannot generate commercial traffic and by default banking for receiving the money resulting from the transactions.
The Americans would agree in principle to take liquid ammonia from the Russian border with Ukraine and operate it through Odessa-Pivnyi-Chornomorsk thus favoring one of the Russian demands.
The UN is trying to negotiate between the parties to harmonize commercial interests with humanitarian ones, but the problems they encounter are quite big, because the money resulting from the Russian wheat trade via the Caspian Sea returns drones and missiles of Iranian origin. And Russia declared that if the UN sends teams of experts for the definite identification as being of Iranian origin, they will stop the negotiation process for the extension of the green corridor. But today, the end of the war seems extremely far away. The war in Ukraine will last long and well.

Russia attacked Ukraine’s energy infrastructure.

Factories will only work according to a predetermined schedule, including sunflower seed processing units. Armament productions destined for Ukraine have delivery dates in the summer of 2023. There will be another 2-3 weeks of fighting. Then at minus 35 degrees everything will freeze. The thaw will bring the swamp from the thaw through which no one passes.

Russia mobilized not only 300,000 reservists, but 1 million. Ukrainian marketing only points to Russians’ stupidity and losses. They also have the same death toll as the Russians – 60,000. The current problem is the Iranian drones which are very cheap and cause immense damage. It doesn’t matter that the Ukrainians shoot drone swarms with Kalashnikovs, the drones’ 40% efficiency and low price make them effective, very effective.

ARGENTINA and AUSTRALIA are two other areas of impact in the future development of the wheat price trajectory. The first will generate a minus in overall production, and the second will generate poor crop quality, compounded by a delay in harvesting.

CONCLUSIONS

Russia has no standing in the Istanbul Agreement signed between Ukraine-UN and broker Turkey. It has its own separate agreement. Russia can block the continuation of this agreement, which can continue if none of the signatories denounces it, only by the typical aggression, that is, the establishment of a naval blockade in front of Odessa.

Russia is interested in selling wheat and fertilizers, but the European Union does not seem willing to give in to the usual Russian blackmail, and thus the desire to sell fertilizers on the territory of the European Union is met with total opposition. Moreover, the Union admitted that the drones attacking the cities and infrastructure of Ukraine are of Iranian origin and are preparing sanctions against the regime in Tehran.

Turkey has every interest in Russia developing a gas distribution hub on its territory with its competition, and thus will try to convince Russia not to block the continuation of the Ukrainian corridor.

The tension will continue until around November 10-15, when we assume that Russia will agree to keep the corridor open, with certain conditions, of course. Why do we have this assumption? Winter is approaching, and battles and deployments will no longer be possible in the operational theaters. At minus 35 degrees, things will calm down. Both sides will go into conservation, and hostilities will resume in the spring, more precisely March 2023. Meanwhile, Russia will strengthen its military and potential, and Ukraine will receive investments in armaments and training of its own soldiers. All the while, the economy needs to work, and Russia cannot afford new sanctions. What they are doing now is nothing more than blackmail to get something they want, which is the fertilizer trade, because their wheat is moving to destinations.

It is extremely simple. Russia has wheat and Ukraine has corn. Interests diverge in this regard and winter creates a lot of problems in Russian and Ukrainian ports. Azov freezes, parts of the Black Sea become impassable, and both combatants need to restore their weakened financial systems.

All this time, the trading algorithms have been long-positioned waiting for the tension that will lead to an increase in the price level on the stock exchanges, so that Profit Taking can take place and thus the profit of the hedge funds can be consolidated.