Romanian AGRI Column - issue 14/2022

This week’s market report provides information on:

FAO INDEX

WHEAT MARKET

BARLEY MARKET

CORN MARKET

RAPESEED MARKET

SFS MARKET

SOYBEAN MARKET

CONSTANȚA LINE-UP

EUR-USD PARITY

FOSSIL ENERGY

WEATHER FORECAST

FAO REPORT (April 8, 2022). FOOD PRICE INDEX

The FAO Food Price Index* (FFPI) averaged 159.3 points in March 2022, up 17.9 points (12.6 percent) from February, a huge leap to a new highest level since its inception in 1990. The latest growth reflects new historical highs for vegetable oils, cereals and meat sub-indices, while those for sugar and dairy products have also increased significantly.

LOCALLY

The price of wheat in the CPT Constanța parity was on Friday, April 8, 2022, at the level of 330 EUR/MT, with a discount of 20 EUR/MT for feed quality. Everyone was waiting for the USDA report, which brought changes in the volume available in the Black Sea basin. Our stocks have been reset and our estimates for the market starting today are of the level of 335 EUR/MT in the CPT Constanța parity.

At the local level, the problems caused by the drought are not fading in the region of Moldova, starting with the Focșani area, Vaslui-Galați area and the Bacău area, the drought continues and is persistent. This phenomenon is also present in certain areas in southern Romania, as well as marginally in areas in the west of the country (Arad) and in Dobrogea.

Here are some of the problems and effects of prolonged drought:

The drought has been in place in Romania since the fall of 2021.
For this reason, the sowing season with wheat has been greatly extended. This has led to a degree of non-emergence and uneven emergence at the national level
During the winter, the lack of precipitation has left its mark again, the water level in the soil being very low.
In the area delimited to the south by Focșani, to the north by Bacău and to the east by Brăila and Vaslui, an area has developed in which the pedological drought has started.
In the region mentioned above, the winter crops, in this case, wheat, barley and rapeseed, will have drastically reduced yields (eg: if they harvested 5 tons/ha for wheat, they will now have 2-3 tons/ha).
From discussions with farmers, some areas sown in autumn with barley and rapeseed will be sown now with sunflower and corn.
In the next period (until April 20), precipitation is expected throughout the country (10-14 l/sqm), but the contribution of these rains will not be enough to restore the water supply from the soil, especially in the area of Moldova mentioned above.
This will call into question the production of maize and sunflower seeds in that area.

In conclusion, we have questions about the value of production in Romania, both in autumn and spring crops, due to the persistent lack of water.

The price of the new wheat crop is still at 320 EUR/MT, but according to the WASDE report, it could exceed 323 EUR/MT on Monday in the CPT Constanța and DAP Processor parity.

REGIONALLY

In the Black Sea basin, things are not moving in the right direction. The Russian invasion continues to grind Ukrainian territory, even as withdrawals from the Kyiv area have given this nation a breath of fresh air. Russia retreats to counterattack on Southeast Corridor. The intention to cut off the nominated part would implicitly lead to a total cancellation of Ukraine’s access to the Black Sea.

UKRAINE WHEAT COMPARISON: 2021-2022 VS. 2022-2023

Let’s explain the numbers, for a good understanding:

We will have a minus of 1.93 million hectares.
We will have a decrease in yield per hectare of 0.73 tons/ha.
The decrease in total production will be dramatic, from 32.16 million tons to 19.65, i.e., a minus of 12.51 million tons.
The estimated export level for 2022-2023 will be 16.3 million tons. It is a decrease of 8.3 million tons compared to the initial forecast 2021-2022 of 24.6 million tons, as Ukraine’s exports stopped at 19 million tons. In other words, they still had about 5.6 million tons to export. This remainder will be included in the 2022-2023 crop.

Russia will generate, as we mentioned in past issues, a crop of 80-82 million tons, with an export level of around 37-38 million tons. For the old crop, they continue the export pace mentioned in the last issue, the month of March 2022 being much higher than March 2021 in terms of export tonnage.

But in terms of logistics, things are not that simple. Simply passing through the Kerch Strait is not enough. Ships must be insured, as must their cargoes. And here things get complicated for Russia. The maritime insurance market in London has declared all maritime waters of the Russian Federation a “military zone”. When a ship is about to enter this territory, the shipowner MUST notify its insurer and pay a “war premium”. According to other market analysts, the cost of insuring a ship entering the Black Sea gets out of hand as the risks of war increase (including mine drifting). And we’re talking about insurance premiums in excess of millions of dollars.

This does nothing but bite the price that Russia gets on wheat and the other goods it exports. At the same time, the ruble is strengthening against the US dollar and this is making the local market extremely confusing. The dollar converted to rubles in the price of wheat makes the level that an exporter receives unmotivating compared to the local Russian market. In other words, the local market competes with exports, if we add up the effects of the exchange rate and the costs of insuring ships and goods.

EURONEXT posts the volatility generated by the WASDE report by increases in the price level of wheat at the end of April 8, 2022, with direct reference to May 2022. Subsequently, it also gains the quotation of the new crop, but not at the same level.

What we must not forget, however, is the date we are on and the fact that the business days in April are very few. We are in Ramadan, the Catholic and subsequent Orthodox Easter holidays are coming in a few days, which will lead to the total exit from the business for a period of at least two weeks, from April 14 to April 26, 2022.

We must also take into account the times when the indication MAY22 will expire on wheat and, as we are accustomed to, this will start around April 20, 2022. Practically, towards the end of April, we will move with the wheat indications directly to SEP22 as reference.

Until we see the closing quotations of EURONEXT, it is worth mentioning a not at all positive thing about the European wheat crop (soft wheat), which falls in estimates from a forecast level of 137 million tons to 134 million tons, representing a minus 3 million tons. This is an extremely important parameter in the calculation of the crop and, implicitly, of the price, especially if we add with the disappearance of the volumes in Ukraine and the state of the crop in the USA (as we will see in the global chapter).

EURONEXT MLK22 MAY22: 372.75 EUR (+9 EUR) at the close of April 8, 2022

WHEAT TREND GRAPHIC – MLK22 MAY22

All the while, however, BSW (Black Sea Wheat) decreases in quotations. The month of May is trading down to 390.75 USD (358.8 EUR) at a parity of 1.1087 EUR/USD. This is the price paid for the lack of predictability and sustainability by the Black Sea basin. Unfortunately, Romania is a component of the basin and is directly affected by this. In a simple calculation, the price in euros indicated for the month of MAY22 discounted by the costs of fobbing and the exporters’ margin generates the low price level that we displayed at the beginning of the report, namely 335 EUR/MT. Romania, in turn, is affected by the costs of insuring goods and ships entering the Black Sea. Mines and the war zone are costly arguments.

GLOBALLY

HOUSTON we might have a BIG problem!!! This is what the USDA announcement would sound like, through their expert, Karen Braun, an exceptional scout and analyst who now confirms exactly what we estimated as early as December 2021, when dust storms reaching 160 km/h, unfolded at temperatures of 24 degrees Celsius. They kneaded and dried the southern part of the North American Central Plains.

These photos are testimonials of December 2021 in the US:

We resume all the factors that determine the market, and which our analysis model takes into account at all times:

Supply & Demand
Weather
Stocks exchange
Reports
Politics

Thus, according to the USDA (Karen Braun), the winter wheat crop in the US has come out of rest in a miserable state, after a historically dry winter in the key production states, almost guaranteeing that the crop will not be among the best of the country.

The timing is not great, because the tensions in the wheat market are high. Global wheat prices hit record highs last month after war broke out among top exporters in Russia and Ukraine, and this came as a result of an already tight supply situation. The United States is also one of the world’s leading suppliers of wheat.

The U.S. Department of Agriculture said 30% of U.S. winter wheat was in good or excellent condition on April 3, well below the 40% and 53% trade expectations of last year (and remember last year when they discounted the crop from 54 million to 45 million tons).

Crop health was seldom so poor in early April. Only 27% of winter wheat in 1996 was good or excellent in the first 10 days of the month, and 2018 recorded 31% in the same period. Final yields were poor in 2018, but terrible in 1996.

In fact, winter wheat production in the US has never been above the long-term trend, when far less than 45% of the harvest is good or excellent in early April. With 1996, bad crops, such as 1989, 2002 and 2014, were also in poor shape at this time. The records date back to 1986.

This year’s crop, which is expected to be harvested in June and July, was healthy last fall as crops were sown in very dry soils in the plains and western United States. The winter rainfall was among the weakest ever in those areas, almost ensuring that the wheat will appear in a very weak form in the spring.

Not all crops end up being disastrous when health assessments are low at this time. About 36% of winter wheat in 2011 and 2013 was good or excellent in early April, and adequate, but not good, rainfall in April helped yields fall by only a few percentage points from the trend.

Rainfall is the most critical in April, after the crop comes out of winter rest. However, the US government’s outlook for April suggests that the Southern Plains area may remain drier than normal. This is a typical side effect of La Nina, which occurs when the surface waters of the equatorial Pacific Ocean are colder than normal. Conditions of La Nina are expected to persist in the summer in the US, as in other years when winter wheat conditions were low and crops were very disappointing, including in 1989, 1996 and 2018. In fact, almost all crops with poor health in early April were associated with La Nina or near La Nina conditions.

The good thing is that American farmers seem to have planted the largest area of winter wheat in the last six years, as revealed last week in the USDA survey. However, if the US winter crop weakens, total wheat supplies will remain under pressure, as the spring crop is questionable at this time. American farmers are ready to plant the smallest area of spring wheat in five years and get one of the worst crops after a severe drought. Drought remains the reality in many areas with spring wheat.

Our primary estimate for US wheat production for the 2022-2023 season indicates a decrease of at least 7 million tons at this time. But things will change. Prolonged drought, as well as the heat of the weather, could push this decline to higher levels.

CBOT, in the light of WASDE and as an effect of this report on wheat crop, is increasing quotations again. The trading algorithms react promptly and so we have the following indications on the close of the night of April 8-9, 2022. The Kansas and Minneapolis stock exchanges also react identically.

But what should be noted is the POSITIVE crop inverse between MAY22 and SEP22. Basically, the new crop wheat in the USA is more expensive than the one listed in MAY22. This tells us a lot about the impact of the analysis report on the condition of American wheat at this time. The warning comes a long way from the harvest. The imminence of the volume decrease is recorded by algorithms and thus our confirmations are fulfilled. We’ve been raising the warning flag since December. Weather is the most capricious factor in the whole wheat equation.

CBOT ZWK22 MAY22 – 1,051 c/bu (+ 31 c/bu +11.75 USD)

WHEAT TREND GRAPHIC – ZWK22 MAY22

WHEAT PRICE INDICATIONS IN MAIN ORIGINS

ANALYSIS

Ukrainian wheat crop is declining.
European wheat crop is declining.
The US wheat crop is declining.
Demand from China is growing.
Demand in the Middle East is rising.
Demand in North Africa and Sub-Saharan Africa is growing.
Input costs have risen and are showing no signs of stopping.

DOES ANYONE ELSE BELIEVE IN CHEAP WHEAT? WE DO NOT THINK SO.