AGRI Column - issue 41/2022

This week’s market report provides information on:

SUSPENSION OF THE GREEN CORRIDOR

WHEAT MARKET

BARLEY MARKET

CORN MARKET

RAPESEED MARKET

SFS MARKET

SOYBEAN MARKET

CONSTANȚA LINE-UP

EUR-USD PARITY

FOSSIL ENERGY

WEATHER FORECAST

SUSPENSION OF THE GREEN CORRIDOR

CONSIDERATIONS AFTER RUSSIA’S DECISION TO SUSPEND THE CORRIDOR, FOLLOWING THE EVENTS OF OCTOBER 29, 2022, REGARDING THE UKRAINIAN ATTACK ON SHIPS IN SEVASTOPOL

Russia through the Ministry of Defense announced the suspension of the agreement regarding the “grain corridor”. This announcement came hours after Ukrainian water drones attacked Russian ships docked in the port of Sevastopol. Russia denounces a combined attack carried out with the help of Great Britain and thus reserves the right to SUSPEND the Istanbul deal.

Also on October 29, 2022, Russia announced that it would ship 500,000 tons of wheat to poor countries in Africa, to try to eradicate the potential for famine as much as possible, under the given conditions.

Following this announcement, we were trying to unravel the effects and causes that led to this.

Russia had for a very long time been dissatisfied with this Istanbul agreement, in the sense that its written demands had not been fulfilled. And we all know that the agreement signed by Russia with the UN and Turkey as a broker has never been seen by anyone except the signatories, Sergei Shoigu from Russia and Antonio Guterres from the UN.

But knowing the Russian negotiation system and knowing the sanctions imposed on the Kremlin regime, we believe that Russia has asked for no more and no less than the lifting of sanctions on banking transactions resulting from trade in wheat and agricultural products, as well as lifting the sanctions applied to fertilizer companies, in this case the Russian oligarchs who own them, for example Uralchem.

Russia has no role in the agreement signed by Ukraine with the UN and Turkey as a broker, as it is not a signatory party. That agreement has the power to continue beyond its expiration on November 22, 2022, unless terminated by either party.

Russia has been trying for a very long time through various statements and signals to reclaim its written claims in its Istanbul agreement. But the EU and Anglo-Saxon allies didn’t even want to hear about such a thing. From the perspective of the EU, it is simple and clear. The Union was not a party to that negotiation, only Mr. Guterres from the UN. Then let Mr. Guterres solve your written demands together with Mr. Erdogan, the mediator of the agreement.

Russia has effectively sabotaged the grain corridor by being extremely slow in carrying out inspections of goods being escorted to Istanbul. There was a traffic jam of about 150-160 ships waiting to be inspected and pass through the Bosphorus. Source: Marine Traffic.

Turkey was and is a beneficiary of the corridor formed by the three ports, Pivnyi, Odessa and Chornomorsk (POC).

Turkey benefited from Ukrainian goods at a highly discounted price, Turkey received significant sums of money for logistics and inspections from Istanbul. Turkey’s interest is therefore mainly financial, how else? Cheap wheat and corn, together with oil and sunflower seeds.

AFTER THIS BRIEF SUMMARY OF THE CAUSES, LET’S GO TO THE EFFECTS OF THE UKRAINIAN ATTACK:

Russia suspends the grain corridor, claiming escort ships were hit. And if we compare the 1,000 Iranian drones that hit Ukraine’s energy infrastructure to this maximum 10 drone attack on ships in the port of Sevastopol, the ratio is effectively ridiculous. Moreover, in the port of Sevastopol were Russian warships, withdrawn from the Ukrainian coast following the Istanbul agreement.

Russia, hours after the announcement of the suspension of the agreement, notified the UN through its Russian representative regarding the meeting of the Security Council on this topic. It is the first sign that the Ukrainian attack was for Russia only a “casus beli” or leverage for a negotiation, which we will return to below.

For now, Russia by clearly expressing “suspension” indicates some essential things:

Russia wants to negotiate the lifting of sanctions on payment systems. Let’s not forget that Russia sells wheat to Pakistan in the barter system (fruits and vegetables). It sella 5 million tons to Iran against drones and missiles, as well as spare parts from the Renault factory in Iran and so on, including Afghanistan (what will they get in return? Lithium and possibly uranium), Saudi Arabia, Algeria, India, Lebanon, Libya, and many other destinations, some of them extremely obscure, like Syria.
Russia wants to lift sanctions on Russian oligarchs who own fertilizer plants. Their stocks are extremely high and they have no outlet. The batches stored throughout Europe are literally frozen, they are not allowed to be traded. Any bank that sees a payment invoice for fertilizers of Russian origin clearly refuses it. Even through the satellites created in Kazakhstan, Turkmenistan and Uzbekistan, traces of goods are detected. And realistically speaking, the three countries listed above have an interest in selling their own production, not the Russian one, even if it is discounted by the commercial network of the Russian oligarchs. Yes, they can sneak indigenizing goods through their lots, but the volumes are not large. Fertilizers are produced using gas and phosphate rock. At the moment, gas is extremely low because Europe no longer needs Russian gas (winter stocks are secured), Russian fertilizers are in very large stocks, and they cannot trade them.

In conclusion: Russia wants to sell wheat and fertilizers. However, no one has imposed sanctions on these products. So they can’t talk openly about it. There are sanctions on payments and oligarchs, which Russia prefers to keep quiet.

Russia will not dare to openly bomb the three ports in the Corridor. Why? Because those three ports are under the agreement signed by Ukraine, the UN and Turkey. And the deal is still in place. The very phrase “suspension” leads to this scenario. Even if they wanted to bomb everything, they can’t do that, there are too many Turkish ships providing logistics, and frankly I haven’t heard of any Turkish ships falling victim to Russian mines or bombing since the invasion started. Turkey would be the last country Russia would want to upset.

UKRAINE. In the less fortunate case of Russia re-establishing the blockade in front of Odessa, they would have the resources to overcome this impasse as well. We are talking about the logistics routes created via Romania, Poland, and Hungary. Logistics routes from the mouths of the Danube on barges, rail and land transport routes are already formed and with a little opening and more attention, as well as by opening new crossing points, it will continue to export its goods. Hard, but they will. The European Union and Anglo-Saxon allies will provide all their support to Ukraine. They will not give in to Russian blackmail under any circumstances.

The big loser in this tension is Russia, which has been trying for a very long time to lift the sanctions mentioned above. And by slowly but effectively sabotaging the corridor, through political statements, through pressure exerted on the Ukrainian energy system to limit the effectiveness of oilseed processing, they directed the process to today’s moment. But when you buy Iranian drones and recruit reservists with the arcane, use Studebaker trucks from the Second World War, donated by the Americans through the Lend&Lease program, you are actually showing what you have become and what you are. You are, in fact, showing your impotence taken to high levels. Russia is stripped bare today and exposed. The nuclear threat is far from being carried out. Why? Simple, because all the Russian oligarchs, all of Putin’s politburo and all the corrupt in his system, including here the famous FSB, as well as the Russian army, through its generals, Shoigu, the clown Kadyrov and the infamous Prigozin, the owner of the Wagner group, all want a one thing namely: LIFE. They want to live, not kill themselves for Putin’s sake. And Putin wants exactly the same thing, LIFE. He is not a hero, he is a coward, a creation of Russian intelligence systems, and these people always walk in the dark, because they fear for their lives.

LOCAL STATUS

The indications of the port of Constanța remain constant at the level of 320-325 EUR/MT in CPT parity. The price of feed wheat is EUR 25/MT lower than the price of bread wheat.

In the country, at the processing level, the price indications are 317-323 EUR/MT, depending on the quality offered to the processing unit.

Also at the local level, sowing is still going on in certain areas of the country. And the target of 2.10-2.15 million hectares will be reached, for sure. But water is necessary, because the sprouted wheat is fragile and needs the presence of water for proper development before entering winter. The forecast doesn’t indicate anything on the horizon in terms of precipitation until around November 9-11. Then the precipitation front will enter from the west and hopefully have the strength to cross the Carpathian arc.

CAUSES AND EFFECTS

The only bullish factor for wheat prices may be a possible degradation of the Green Corridor. This is uncertain today, and the slowness of inspections that I also mentioned in the previous issue generates instability among Ukrainian exporters, who feel that they are losing a cadence in the export rhythm.

ROMANIA, at this moment, looks clearly unbalanced in terms of the level of wheat exports versus imports. We insert the balance on each product separately for a good visualization of the imbalance on certain products.

REGIONAL STATUS

RUSSIA is at the same accelerated rate of wheat export. Permissive weather still facilitates shipments of Russian wheat. In terms of sowing, things are clear, in the sense that they will leave unsown areas for spring crops in the rotation. However, they may be allocated to spring wheat, so the total area sown to wheat in Russia is not final. Now, we have a total of 18.8 million hectares sown, compared to the initial forecast of 19.5 million hectares. Their vegetation condition is very good due to the rainfall, as otherwise, because of the rainfall they have not been able to sow the allocated area.

UKRAINE has managed to sow an area of 3.1 million hectares with wheat so far, which is about 80% of what was forecast, i.e. around 3.8-3.9 million hectares.

Amid talks that the “grain corridor” could be shut down in November, despite several auctions last week, Ukrainian grain was not widely offered and gained even less despite the low price. Many importers are looking for alternative origins. For example, Asian buyers have already increased their purchases of Australian wheat.

The pace of maritime exports slowed and a number of new contracts fell. The inspection procedure of ships heading through the “grain corridor” was also slowed down, which increased their downtime, reduced the number of requests for ships and consequently affected freight rates.

The EUROPEAN UNION shows a healthy vegetative index of wheat crops sown so far. The precipitation falling on the territory of the Union is beneficial and allows the development of wheat before entering the winter. At the level of hectares allocated to wheat cultivation, the distribution remains at the same level of 21.7 million hectares sown with wheat at the European level.

We insert the areas sown with wheat in the European Union segregated by Member States. Romania, as usual, has the 4th place in the European Union in the area cultivated with wheat.

WHEAT SOWING CHART IN THE EUROPEAN UNION

EURONEXT MLZ22 DEC22 337.5 EUR (+1 EUR)

EURONEXT WHEAT TREND CHART – MLZ22 DEC22

GLOBAL STATUS

The U.S. is experiencing tremendous problems with wheat planted this fall. The Central Plains represented mainly by Kansas and Oklahoma have no healthy vegetation at all. Drought is already taking a bite out of the upcoming US wheat crop. According to analysts, 75% of US wheat is in the drought zone with a low reserve of soil water.

ARGENTINA drops production forecast dramatically. Subsequently, Argentina lowered the forecast from 19.5 million tons to 16.5 million tons. But this weekend, degradation has risen to very high levels, and according to local analysts, Argentina’s wheat production will be 12.5 million tons, a maximum of 13.5 million tons.

AUSTRALIA generates, in turn, very big problems, but because of the rains, which do not stop. About 120,000-140,000 hectares of wheat are irretrievably lost and the damage is in the order of 150 million USD. How will it all end? Quality and quantity? We will see together.

CBOT WHEAT – ZWZ22 DEC22 – 829 c/bu (-9 c/bu = -3.3 USD)

CBOT WHEAT TREND CHART – ZWZ22 DEC22

WHEAT PRICE INDICATIONS IN MAIN ORIGINS

TENDERS AND TRANSACTIONS

TURKEY TMO purchased 495,000 tons of wheat: 245,000 tons at an average price of 337.05 USD/MT and 250,000 tons, delivery November 25-December 13, at an average price of 341.65 USD/MT CFR Turkey.

SAUDI ARABIA SAGO purchased 566,000 tons of bread wheat, 12.5 PRO, for delivery in March-April 2023 at an average price of 384.75 USD/MT CFR. For Black Sea origin, the transportation cost is around 50-55 USD/MT. The difference is the port of delivery if it is in Jeddah or Yanbu. Thus, discounting the CFR price results in a level of 329.75 USD/MT FOB BLACK SEA. From this price we need to extract the costs of storage and financing of the goods until March-April 2023, about 20-22 USD/MT. This gives us a FOB BS price of 308 USD/MT. And finally, the cost of fobbing and the exporter’s margin must be extracted, at least 12-14 USD/MT. So the Black Sea equivalent indication is 294-296 USD/MT, provided the wheat is 12.5 PRO quality and clearly indicates Russian origin.

Sample from completed tender. Jeddah Port (CIF):

65,000 tons of wheat from CARGILL at 380.47 USD/MT CIF (March 1-10, 2023).
65,000 tons of wheat from OLAM at 378.25 USD/MT CIF (March 20-30, 2023).
65,000 tons of wheat from OLAM at 378.25 USD/MT CIF (10-25 April 2023).

MIT JORDAN purchased 60,000 tons of wheat from CHS at 372.75 USD/MT CFR AQABA, delivery in the first half of January 2023. The other bids were: Buildcom 374.50 USD/MT and Cargill 384.30 USD/MT.

TCP PAKISTAN. The lowest price offered in Pakistan’s tender for the purchase of 500,000 tons of wheat, which ended on Wednesday, was seen to be 373.00 USD/MT C&F. State agency Trading Corporation of Pakistan (TCP) is still considering bids and no acquisition has been reported. Offers submitted below. They must remain valid for 80 hours after submission. All bids involved wheat from multiple optional origins.

Aston 120,000 tons at 373.00 USD/MT, CHS 125,000 tons at 384.40 USD/MT;
Solaris 120,000 tons at 384.91 USD/MT, Falconbridge 120,000 tons at 387.79 USD/MT;
Cargill 120,000 tons at 393.00 USD/MT, Ameropa 110,000 tons at 394.00 USD/MT;
Agrocorp 110,000 tons at 397.38 USD/MT, Bunge 110,000 tons at 414.15 USD/MT.

CAUSES AND EFFECTS

Wheat consumes a technical end of the month in the stock markets. We are seeing declines in the CBOT these days, a clear sign of technicality, position liquidations and rollovers.

However, the tension in the Black Sea basin is in place. Nothing is decided yet. But Mr. Putin has the power to joke about the use of nuclear weapons, claiming that he only wanted to accumulate an effect and nothing more.

By diminishing Argentina and Australia, Russia will strengthen its position as the Primary seller (volume and quality). Russia will continue exports and is already strengthening its position in Asia. One by one, India, Pakistan, Iran ratified agreements for wheat deliveries against other agricultural products or armaments.

We have no illusions, Russia will not stop the invasion of Ukraine, it will only delay until the spring to restore its stockpiles of weapons and troops.

The weather helps Russia. If not for the problems in Argentina and Australia, Russian wheat would have suffered a price depreciation and, by implication, a drop in demand in certain destinations. But he has the lion’s share in Saudi Arabia, Pakistan, Iran, India and Turkey, destinations that buy extremely significant quantities at the moment.

The scenario where the corridor in Ukraine does not work can be considered, but there are too many problems that Russia would create if it stopped Ukrainian exports. First, their entire narrative of wanting the world to be fed would disappear. They would incur new sanctions on their ships and passage lanes to their destinations would be made more difficult.