Romanian AGRI Column - issue 9/2022

This week’s market report provides information on:

WHEAT MARKET

BARLEY MARKET

CORN MARKET

RAPESEED MARKET

SFS MARKET

SOYBEAN MARKET

EUR-USD PARITY

FOSSIL ENERGY

WEATHER FORECAST

THIS IS UKRAINE

LOCALLY

We start the wheat road with observations towards the port of Constanța. It will soon be overcrowded due to the diversion of traffic from Ukraine, especially container traffic, as well as other general cargo.

In the context in which the largest container operators in the world have stopped trade relations with Russia (we list here MAERSK, CMS, MSC and others), and merchant ships will no longer enter the port areas of the Black Sea basin due to the dangers (the bombing of the Russian navy, as well as the mines installed in the area), the port of Constanta will take over the weight of maritime traffic in Ukraine.

We list Odessa, Chornomorsk, Mykolaiev, Kerson, Ochakiv as main ports, as well as the Bistroe canal. The port of the Sea of Azov, Berdyansk, is already destroyed by Russian bombing and damage is being done to Mykolaiev.

The damage caused by the Russian army will generate operational delays of at least 40-60 days. Thus, we could get very close to the new crop in operation from the Ukrainian side. In the pessimistic scenario, regarding the prolongation of the conflict and its duration more than 30-50 days from now on, we will not have the wheat flow from Ukraine.

Russia has closed ports in the Sea of Azov, Novorossysk, Caucasus, Tuapse, Taman and Kavkaz. The Kerch Strait is blocked and the entire Crimean region is an exclusion zone, meaning no ships can cross it.

But there are other limitations. Constanța and Agigea operate only 2 container terminals each, the rest of the berths being destined for bulk and partially liquid goods. We estimate a finality that will coincide with a similar situation during the summer, when the port is blocked by bulk cargo and trucks, and until the ships succeed each other in operation, these endless queues should not stop. This will definitely happen. Shipowners will no longer enter Ukrainian ports due to the state of war, will no longer enter the Sea of Azov due to the blockade of the Kerch Strait by Russia, and insurance companies will no longer insure ships en route to these destinations.

There is a state of tension in the local market which makes exporters extremely nervous. They cannot afford to pay prices in line with what is happening on the stock exchanges, for the simple reason that the uncertainty regarding potential export restrictions is quite pronounced. The risk of starting a contract and then of not being able to honor it is extremely high.

Thus, what we see as quotations were reduced to 330-340 EUR/MT CPT Constanța, in total disagreement with the indications of Euronext and the status generated by the war that is taking place nearby.

The new wheat crop is not listed. Nobody wants to assume any amount, given that the price on Euronext is constantly rising, given the political factor, i.e., the war in the vicinity of our borders.

Romania is currently the only logically positioned location that can provide fluency to the Middle East, and we will briefly list Egypt, Jordan, other Arab countries, as well as destinations in SE Asia and NE Asia. In comparison, the distance Constanța – NE Asia costs 56.25 USD/MT, while the indication US Gulf – NE Asia costs 63 USD/MT.

If we take the relationship Constanța – Egypt, we have a cost of 25 USD/MT versus 85 USD/MT from US Gulf. With these examples, we highlight the logistical superiority and the geo-strategic potential of Romania, which remains the only predictable and sustainable player in the Black Sea basin.

Romania has an aggregate wheat export level of almost 5 million tons, from the agricultural year 2021-2022. The production of 2021 being 11.2 million tons, with an export level of 5 million tons and a domestic consumption of 3.3 million tons, we estimate an export difference of maximum 2.8 million tons, from this moment.

But Romania’s wheat crop forecast for 2022 is not one of the most optimistic. The autumn drought that delayed the sowing, as well as the lack of precipitation, will generate a deficit of at least 1.2 million tons, reporting everything to a multiannual average of 9.6 million tons.

REGIONALLY

At the regional level, we note the first protectionist actions in Hungary, which completely restrict the export of cereals, and the details will be published in an official document soon. The Republic of Moldova, in turn, has banned the export of wheat and corn, and Serbia has imposed an export tax on wheat.

Bulgaria also restricts exports, but does so in a different way, as follows:

About 1.5 million tons of wheat will be allocated as an export quota, but it is unclear whether intra-Community trade is also included here.
About 1.5 million tons of wheat will be purchased by the Bulgarian state as a set of security, if the conflict progresses and intensifies, at indicative prices of 320-330 EUR/MT.
Corn will be completely restricted to exports.
Oilseeds will not be impacted, knowing that Bulgaria is a processor of oilseeds due to its infrastructure and runs raw materials mainly from Romania.

The European stock market is indeed galloping in terms of wheat indications. Quotations exceed levels hard to imagine before the conflict. But what we estimate before the conflict happened with an accuracy of 100%, namely the price of wheat reached a level of 330-340 EUR/MT in the CPT Constanța parity.

EURONEXT MLK22 MAY22 – 371.75 EUR at the close of March 4, 2022

EURONEXT TREND GRAPHIC – MLK22 MAY22 WHEAT. The picture is worth a thousand words.

The first signs of the devastation caused by the conflict will be soon seen. And we’re talking briefly about both the old and the new wheat crop:

THE OLD CROP:

Ukraine and Russia still had to export a cumulative level of 16-17.5 million tons – Russia about 8-9.5 million tons, and the difference on behalf of Ukraine, which was to reach the level of 24.7 million tons export quota, but was stopped at 17.9 million tons.

In the context of the global balance of supply and demand, the existence of these blocked volumes creates a very big problem. The balance had been found, the negative difference in the last WASDE report of about 9 million tons seemed surmountable with the help of the expected increase coming from Australia, which will be adjusted positively by 3-4 million tons, from a level of 34 million at a maximum of 38 million tons. Argentina also contributed to the balance with the 1-1.2 million tons generated in addition as crop level.

At the moment, however, the global balance of Production-Consumption-Stocks is very unbalanced. Such a non-exportable stock of goods in the basin impacts the market in the medium term by unbalancing supply to the detriment of destinations.

Every day without port activity on the Black Sea, about 100,000 tons of wheat and 100,000 tons of corn are NOT loaded. EU stocks are limited, so there is every precondition for wheat prices to rise sharply. Let’s not forget that record levels were reached in the context of 2008, when wheat reached 520 USD/MT.

In the current context, there are very confusing situations from a legal point of view. We refer to the declaration of force majeure by the seller. Given that the seller has sold in CIF Egypt parity, for example, and the transport is provided by the Egyptian National Naval Company (NNC) and the latter cannot send the ships for loading, we are at a standstill. The seller cannot declare force majeure, because he cannot charge not because of himself, but because of the one who sends the ship to the cargo, Charter-Party. The buyer cannot declare force majeure, because he buys in CIF parity. In other words, there is a legal deadlock that only lawyers can resolve in this context.

But the problems continue. Ukraine’s port infrastructure has been damaged to some extent. It takes weeks/months/years to recover, depending on the level of damage. Problems with financing/trade sanctions in Russia, even if they are reduced now, will take weeks to resolve (months/years to regain confidence as a source). Insurance companies no longer cover travel in the area due to the conflict.

If wheat from the Black Sea is not available by July, either because of the ongoing conflict or because of sanctions on Russian wheat exports, prices could rise significantly.

If sanctions were imposed on wheat exports, we could still see governments in some large importing countries, such as Iran or China, ignoring Western sanctions on Russian exports and still procuring grain – as well as countries with food insecurity, especially in the Middle East, East and North Africa.

The demand will have to be rationalized in the short term and will need to be moved geographically to other sources: EU, USA, Argentina, Australia.

But are these origins well enough prepared to take the shock of the missing stock in the Basin? From a logistical point of view, it is a major handicap, which we found in the last attempt to acquire Egypt through GASC, where the highest value was given by American wheat, with a level of 517 USD/MT CIF Egypt. The French wheat present in the auction was quoted at 430-439 USD/MT, also delivered in CIF Egypt parity.

Destinations switched from the “hand to mouth” status to “hold your breath” behaviour. Don’t move, don’t breathe and just wait for a stabilization, maybe a cessation of the conflict, a decent normalization in order to be able to resume transactions at more realistic prices, because what we see today does not really make sense. Today’s prices are based on panic, fear and disorder.

Because we also mentioned tenders, we let you know the latest transactions, as follows:

GASC tender of March 3, 2022 was canceled. The CIF equivalent is 517-520 USD/MT. Another issue is the declaration of force majeure. If the GASC is charter (NNC) and does not present the vessel when loading, the seller is not obliged to declare force majeure. GASC has to do it, but the process is more difficult.
ODC Tunisia purchased 100,000 tons of durum wheat from Casillo at a price of USD 634.89/MT C&F. The tender was initially set for the purchase of 75,000 tons.
TMO purchased, subject to confirmation, 370,000 tons of wheat in its auction on March 4, with delivery on March 10 and April 8, 2022. Prices range from 410 USD/MT to 517 USD/MT, the difference being the customs and unloading port. However, TMO announced the subsequent rejection of about 75,000 tons of the auction due to a very high price.

As a conclusion of the above, the old crop wheat will be expensive no matter what. There is no viable counterweight to goods in the Black Sea basin. Other possible zonal protectionist policies will follow, and there is still a long way to go before the new crop.

The NEW CROP, which we will discuss below, already has a major handicap:

Ukrainian farmers will not be able to work in the field. The chaos caused by the war will cause delays in the spring sowing of sunflower and corn seeds.

Ukrainian farmers will experience operational adjustments in seed volume, crop protection products and fertilizers.

Russian farmers will be acutely affected by the lack of seed and crop protection companies. In other words, they will lack technology, and this will be reflected in yields.

Russian farmers will feel the shock of the exit from the global trade circuit, in terms of prices, coupled with the sharp devaluation of the ruble against the US dollar. Their goods will be disproportionately sanctioned in terms of prices compared to set-up costs. For example, 1 USD = 107 RUB.

We draw preliminary conclusions and we can say that we will have a production deficit in both countries. The current situation makes spring work difficult and production yields could fall due to the lack of application of technology and the siege and the fact that Ukrainian farmers are defending their country. In Russia, agricultural activity will be affected too by sanctions and isolation, which will cause technology companies to disappear from the Russian market.

To make matters worse and more complicated, drought in North Africa and the Middle East will increase demand for wheat. Specialists’ estimates show a 38% increase in demand. Iraq is already setting the tone, announcing a demand for 2 million tons of wheat as a reserve at this time. They are asking for funds to secure this state reserve, which has not been taken into account so far.

GLOBALLY

American wheat indicates weakness in the Central Plains. Although it may seem premature to discuss this, we raise once again the question mark over the American wheat crop. We set aside any USDA statistics on area, productivity per hectare, and production. We are trying to outline the effects of the December weather, we are trying to combine the information about the lack of water supply in the soil and about the volume potential, which will certainly have a decrease in all this context of things that have happened and been recorded.

But we get news from China that worries us. Minister of Agriculture, Tnk Renjian, says the Chinese wheat crop is the weakest in history. The marketing year 2021-2022 brought China almost 137 million tons of wheat. Judging by the seriousness of the statement, we try to understand what the “weakest” harvest in history means. And we reduce last year’s figure by 20% to a level of 109.6 million tons, a decrease of 27 million tons. Who replaces it? And how? On land, the chances are extremely low. Only 27 million tons can be sent by shipping. This is in addition to the annual import requirement of 10-12 million tons, as a surplus over own production.

Moreover, Chinese Premier Li Keqiang said: “We need to work together to secure the food basket and make sure that the population is fed. At the same time, China will stop any attempt to use the arable land for anything other than agriculture and, in particular, intensive grain cultivation.

So we have in front of us a real Gargantua, an insatiable organism. Outside of its own reserve, China must meet its economic model of governance, and we will see it in full pursuit of food, searching and buying everywhere.

CBOT identically reacts to EURONEXT. Mutual funds are in position and playing money in extremely short terms. We see how net long positions accumulate and how profit scenarios generated by the Black Sea war are constructed as a puzzle based on algorithmic bases.

CBOT ZWK22 MAY22 – 1,209 c/bu (+75 c/bu) at the closing date of March 4-5, 2022

CBOT WHEAT GRAPH – ZWK22 MAY22

PRICE INDICATIONS IN VARIOUS ORIGINS

ANALYSIS

The long scenario or the short scenario are the two options to consider. Each of them generates a transition to a new crop. But the short one can generate much more stability.
Of the two scenarios, whichever is chosen, the impact will come from the new crop.
The price of old crop wheat has been amplified by political factors, war and protectionism.
No improvement in current status is expected within 45-60 days, which puts the new crop under pressure today: war, protectionism, weather (see China, see Middle East, North Africa and potentially US) are the three factors that fully govern the moment.

THIS IS UKRAINE

The local market reached the level of 262 EUR/MT for the goods delivered in the CPT Constanța parity. The new crop is no longer listed at this time, as volatility is extremely high and the default can occur instantly. The problems we see are related to the sales made to Jordan and Saudi Arabia, because the goods will certainly be hard to find, and the exporters will suffer losses, even if they bought CALL insurance.

THIS IS UKRAINE