Romanian AGRI Column - issue 17/2022

This week’s market report provides information on:

WHEAT MARKET

BARLEY MARKET

CORN MARKET

RAPESEED MARKET

SFS MARKET

SOYBEAN MARKET

CONSTANȚA LINE-UP

EUR-USD PARITY

FOSSIL ENERGY

WEATHER FORECAST

LOCALLY

Starting with this issue, following the WASDE report, we are parting with the 2021-2022 season. It was a marvelous year for Romanian farmers, a year in which they took a well-deserved revenge against the disastrous year 2020. It was a year that we will not meet again soon, a superb year materialized by the fact that Romania has so far exported over 6 million tons and continues to lead sales to Egypt through the local GASC authority.

From now on, we will talk about the 2022-2023 crop, as it is, full of uncertainties and full of side effects caused by the weather and the political factor.

The local wheat price indications increased to 385 EUR/MT in the CPT Constanța parity. But the discount for feed quality is extremely high, reaching 20 EUR/MT. We find the old technique in the wheat sales complex. If the Test Weight (TW) falls below 75 kg/hl, the declassification is instantaneous. The same goes for the protein content – what is below 11.5% is downgraded instantly. And the measurements are always governed by the principle of 0.5% uncertainty.

The 20 EUR discount always favors the buyer because he carries out the mix of qualities, so that the average quality indicates the milling parameters. And so it is transferred to a mix of 50% -50% performed at a quantity of 65,000 tons, an amount of 650,000 EUR. This mix is possible in theory, because in practice, the heat, the temperature of the product and the calibration of the equipment are factors that influence the physical measurements. We must recall here the legal conditions. Modern laboratory equipment is not approved in Romania for determining TW. The only instrument permitted by law and approved remains the cylinder. And not infrequently were the cases when the differences between the measurement performed on Granomat, for example, and then with the approved cylinder revealed differences of at least 1% minus in Granomat. 1% can also mean a price discount of 1%, i.e., 3.85 EUR/MT or downgrading to feed quality, which means a minus of 20 EUR/MT on the farmers’ account.

REGIONALLY

FRANCE is facing major problems near the harvest. The indications that we have mentioned in the last two months are taking shape and the degradation of the harvest volume due to the lack of water is a certainty, unfortunately. The initial estimated level of 35 million tons of common wheat or soft wheat, as it is also called, we bring, according to our estimates, to 32 million tons. We will follow closely the evolution of the French wheat crop, but the quality is expected to be good. It is the opposite effect, the smaller the volume generates better quality due to the preservation of nutrients in fewer grains.

RUSSIA, according to the USDA, is indicated at the level of 82 million tons as production. But Russian analysts are claiming 87 million tons at the moment. It is at least a bold statement because we know all too well the Russian way to promote their interests through attempts to manipulate the market.

At the same time, they claim that they will export about 40 million tons, a very high level of exports, judging by the 33 million tons for the 2021-2022 season. Contrary to their claims, we generate questions, as is natural. How will they export, as long as no shipowner sends their large-capacity ships, Panamaxes, to the Sea of Azov, because of the extremely high war premiums, because of the reputation to be maintained (no one will do business with those shipowners sending ships to Azov)?

In the two months since they invaded Ukraine, Russia has been effectively trading in coastal vessels of 20,000-27,000 tons. And we can’t help but wonder – of the 87 million tons, how many are associated with Ukraine? I mean, how many are stolen from Ukraine? And in support of our claim, we are inserting what happened the other day. The satellite images show Matros Pozynich, under the Russian flag, at the dock in Latakia, Syria. After being refused in two ports, this ship with 27,000 tons of wheat landed, in the end, the stolen goods from Ukraine are trafficked through Syria.

We also see the whole planet declaring TV stations in Russia that they will take corn and wheat from Ukraine to sell in China and blackmail and put pressure on the free world to negotiate with them. To negotiate what? The attitude of the supreme predator?

This attitude and this mode of action actually takes us back to the Early Middle Ages.

Let’s recall the article published by the author of this report a long time ago, which clearly indicates that Russia, as the owner of the Black Sea basin, will decide who lives and who dies. The link (in Romanian) here: https://www.zf.ro/companii/retail-agrobusiness/opinie-cezar-gheorghe-analist-expert-si-consultant-pentru-comertul-20551854

UKRAINE estimates a crop of 19 million tons of wheat, down sharply from last year’s 32-33 million tons. This is naturally due to the invasion it is subjected to and the systematic robbery it suffers on a daily basis, starting with the theft of agricultural machinery and ending with the theft of large volumes of goods. However, Ukraine still has an unsold stock of wheat from the last crop, which we still estimate at 4.5-5 million tons.

It now depends, of course, on how much of this commodity has fallen into the hands of the Russians who carry out this systematic large-scale robbery. However, the Ukrainian export projection for the 2022-2023 season is quoted at a maximum of 10 million tons of wheat.

European Union, following consultations and discussions, has generated a plan to create a Green Corridor for Ukraine, in the sense that 20 million tons are to leave Ukraine in the next 3 months. It is, in our opinion, a utopian plan, which has no chance of realization. Expressing 20 million tons in 3 months has more of a political connotation of declaring intentions than a realistic basis for realization. And we will explain point by point the 3 chapters of the green corridor that will have to allow the crossing of 20 million tons through the borders of Romania and Poland.

1. ROLLING STOCK AND TRANSBOARD: to transport 20 million tons you need to load 400,000 wagons or 800,000 trucks. The European Union can replace the green corridor with, say, 10,000-20,000 wagons. You don’t need more, because you can’t actually load in a timely manner. The loading time of a 40-car train is 48 hours.

Suppose that the collective effort will generate a level of 24 hours on the loading of a complete train. We open the border points and assign each one a level of 4 loading lines. We note a maximum number of 8-10 border crossing points: Reni, Giurgiulesti, Halmeu, Dornești, Izov-Hrubeszew PL and the other Polish crossing points, as well as the one in Hungary.

Mathematics gives us the following results:

10 crossing points x 4 loading lines x 90 days = 3,600 trains, i.e., 144,000 wagons. In short, only 7.2 million tons in the three months. And this in the condition that everything must work with the precision of a Swiss watch.

Let’s not forget that trains have to be maneuvered, so locomotives are needed.

Let’s not forget that the goods must be brought by Ukraine to the border and this means volume of wagons and unloading. You can’t actually unload goods between rails or sideways.

Let’s not forget that we need transboarding and loading equipment. Where, how many, how are they positioned and how will they operate? They will have to be arranged either between trains or separately.

Let’s not forget that the goods must be checked qualitatively and weighed, so the 24-hour deadline for a complete train of 40 wagons is completely out of date and out of reality.

Let’s not forget that in Romania the harvesting of the new season starts from June 10-12. And barley, rapeseed will need logistics.

The railway infrastructure in Romania is extremely precarious and, after the wave of accidents last year, the feeling of lack of resistance is very acute.

Not to mention the car transport, the roads are still crowded. Will they endure an additional influx of 10,000-30,000 trucks, knowing that during hot days oversized transport is prohibited?

Identical to trains. During the summer season, passenger trains to Constanta have priority, and freight trains run with speed restrictions on hot summer days. In Romania, the average speed for rail freight is 20 km/h.

It is clearly an unattainable goal. 20 million in 3 months.

2. BORDER FORMALITIES: Staffing for flexible formalities and integration of goods into the Union without crossing the mandatory requirements as a Union border. Another very difficult thing to do, given that it is very easy to move from one state to another at Union level. Customs workers are almost non-existent and need training to retrain. That takes time, financial and human resources.

3. STORAGE OF GOODS IN THE EU: The accommodation for a period of time of the goods in the locations in Romania is somewhat difficult, given the fact that Romania starts harvesting in a maximum of 30 days. And we wonder what owner of a silo or storage base will occupy its storage space with goods from Ukraine when the harvest volumes arrive in waves in Romania, i.e., barley, rapeseed, wheat, sunflower and corn? Who will block the space while waiting for their own crop? It’s a two-way question. One is about the time of harvest, because everyone wants to preserve a potential future, in the conditions dictated by the weather globally. The second meaning is that costs, electricity and fossil fuels have reached very high levels and prices for services have reached a level of 70% compared to last year.

BUT

Something discussed and agreed is missing. An essential element with profound implications for Romanian farmers and for national food security. The protection that must be granted to Romanian farmers is missing, an element that has been discussed and agreed but is completely missing.

At the moment, the goods from Ukraine are offered with a discount of 30-35 EUR/MT compared to the Romanian goods. I explained this whole complex in the previous article in Ziarul Financiar. Ukrainian goods that will enter and transit will be practically in the absence of customs regulations. Thus, the Romanian goods will be pressed with a discount of 30-35 EUR/MT.

Regardless of the destination, export market, intra-community or domestic, Romanian goods must align, in terms of much higher production costs than in Ukraine and in terms of more expensive logistics. The cost of a barge from Galați to Constanța has already doubled.

The relationship is very simple, if we judge only the Romanian wheat and corn. 9.3 million tons of wheat and 14 million tons of maize, with a discount of EUR 30/MT means a gap in the pockets of farmers and, implicitly, of the state, due to the lack of 700,000,000 EUR in the tax base. Instead of returning to the commercial circuit, this amount is lost. Or, at an average production of 5 tons per hectare, multiplied by 30 EUR discount, the Romanian farmer and Romania implicitly lose the value of the subsidy.

Farmers need to be protected. They have other costs of producing goods within the EU. In addition, they must be compensated for the side effects that exist, despite the good intentions of the Union to help Ukraine. Farmers already support the logistical factor generated by this wave. The costs of barges in Galați/Brăila have doubled and we will see road transport biting deeply from the price of goods in the FCA parity, not to mention their availability.

The protection of Romanian farmers, discussed and agreed, is missing from the list of measures. And in the short and medium term, this aspect will create irrecoverable damage to the Romanian food chain. There will be objections to my analysis, however:

“What if I’m right and you’re wrong?”

EURONEXT closes post-WASDE report

WHEAT MLU22 SEP22 – 416.5 EUR (+2.75 EUR)

WHEAT TREND GRAPHIC – MLU22 SEP22

GLOBALLY

In the US, the signal I generated many months ago is finally coming true through WASDE in May 2022. “Houston, we have a problem” is acknowledged. The American winter wheat crop is severely penalized, up to the level of 47 million tons. But it is only the beginning. We see it at a maximum of 44-45 million tons. Time is running out and the problems are getting worse in the South Central Plains, Texas is effectively devastated, Kansas is in trouble, and American winter wheat is not improving.

ARGENTINA will generate a production of only 19 million tons, compared to 21.5 million tons this season. The reduction of the surface is the main factor of the decrease of the production volume.

MOROCCO is suffering from a terrible drought and can no longer keep up. The estimated wheat crop is down 5.3 million tons, which is huge. Normally, Morocco generates about 7.5 million tons of wheat on an area of 2.85 million ha. We expect a major impact on the market in terms of demand, which will come from North Africa. Algeria and Tunisia are neighbors of Morocco.

INDIA is restricting wheat exports, a sign that the decline is not just 6 million tons in the 111 million ton forecast. We may be surprised that India imports wheat. Where from? From Russia, of course. Where? We know, but we’d rather keep quiet for now.

AUSTRALIA reduces the 2022-2023 crop forecast by 6 million tons from 36 million tons to 30 million tons. There is another lack of volume that needs to be addressed in the global context of supply and demand.

With all the calculations performed, we note an estimate of 774.85 million tons globally, decreasing by about 4.45 million tons compared to last year in the same period in production. If we look at it from the perspective of PRODUCTION vs CONSUMPTION, we have a clear imbalance. In figures, we have an overall production of 774.85 million tons vs. consumption of 787.85 million tons = minus 13 million tons.

CBOT at May 13-14, 2022. ZWU22 Remains Stable – 1,181 c/bu (434 USD)

WHEAT TREND GRAPHIC – ZWU22 SEP22

WHEAT PRICE INDICATIONS IN MAIN ORIGINS

ANALYSIS

We are going through a very delicate year. In terms of supply and demand, things are unbalanced before they start.
The original offer loses ground due to the weather factor.
The demand in destinations is becoming more consistent, also due to the weather factor.
Freight flows from Ukraine are routed through Europe, with Constanta being the main module of all new routes.
Constanța receives practically the place of the most important geo-strategic point in the Black Sea basin, in all this context.
But farmers along the entire trajectory of transfer routes need to be protected.