The war in Ukraine took large tonnage volumes of Ukrainian grain off the market in the blink of an eye. Now, only small volumes of Ukrainian grain is exported by land through western borders, as the ports are blocked. Military activity is ongoing across large Ukrainian territories at the time of spring planting campaign. The final results of the planting are questionable that raises fears about prospects of supply of Ukrainian agricultural products in the new season. War factor resulted in a surge of prices and changes in the traditional supply chains. All this has led to the pessimistic forecasts as to the global food security. We have spoken with Matt Ammermann, vice president of StoneX Group, about the threats to the food security, prospects of price formation and grain exports.
- How severe is the prospect of food deficit in the world and particularly in poor countries due to the war in Ukraine?
- The topic of a food crisis has been heightened indeed now that the war remains in Ukraine. Given the proximity of Ukraine and its traditional MENA markets served, its exposes major risks for importing nations that have grown reliant upon Ukraine exports. Other nations will likely step up and fill the gap (E.U., India, US.) but this is all a function of higher prices of which put stress on developing nations. The war also comes just post COVID, when all nations were trying to get their supply chains/reserves back to normal anyhow, so yet again another Black Swan event for the markets to consider.
Per the United Nations (UN), they warn that Russia’s blocking of Ukrainian ports in the Black Sea could trigger a global food disaster, leading to famine, mass migration of refugees and widespread social unrest. It urged governments around the world to allow farmers to plant crops on unused farmland to make up for the lost grain supplies. The UN also urged the international community to prioritize the protection of ports for trade purposes to keep grain flowing in the world. It’s a product of a world that had become conditioned to live on “just-in-time” food supplies in an era that we could quickly move food to where it was needed, but the issue not remains that this is not the case.
Fundamentally the markets have grown tighter as well, major global wheat exporters carryout to use remains at the third tightest levels over recent history, and when you take out Russia and Ukraine as a whole, levels turn out to be with record tightness (similar situation per global corn carryout as well). The largest unknown for the markets right now is what does 22/23 crop season look like and will the normal export flow remain from the Black Sea? Will Q1-Q2 seasonal export flows remain, and if not whom helps fill the gaps? Will the gaps even be fully achieved? All these questions elevate current prices, and put more stress on importing nations, especially developing nations.
A pending question per the global corn markets is what does Ukraine plant as well? The markets know that if you miss the planting window, its not until another 18 months until you see the specific supply back, so the next few weeks will be crucial to watch. This in turn will put more stress on Brazil safrinha production as well as U.S. production, and thus the market will be hyper sensitive to growing season weather all the more. Brazil currently remains in key pollination and U.S. is just starting to plant.
- Which exporting countries can replace Ukrainian grain on the market of developing countries? Can India be a “saver” on the world wheat market, as there are many optimistic forecasts about Indian exports?
First of all, let’s hope and pray that the war end soon so we don’t have to consider this, but the first origin that will look to replace Ukraine exports will be the EU, followed by India, and lastly the U.S. EU does have capacity to serve demand, but this already at a higher price. India can be there as well, but they have a quality issue as well as a quantity issue as they have a limited amount of exports to provide the world. Early estimates put India’s annual exports near 10 mmt.
The unique aspect to the current market is that unlike last year, we don’t have cheap alternatives to consider for demand to go elsewhere. Last year demand moved to feed wheat, feed barley when corn was expensive for example, but this year we don’t have those options available, so demand indeed remains stuck between a rock and a hard place. Exporters are also stuck a bit with old crop supplies as demand is rewarded to wait as long as possible via the current inverse seen in the markets. At the end of the day, these prices are hard for demand to get use to, but supplies will be required to be bought to feed its citizens.
- Many countries have announced different restriction on grain exports, as they are trying to protect their domestic markets amidst the possible food crisis. Will we see stronger restrictions of grain exports in the future?
- Great question, yes there has been numerous efforts by importing and exporting nations to help protect their domestic markets, but traditionally restrictions via exports have been rather common via Ukraine and Russia when domestic supplies are threatened. As we look at the current situation, exports via Ukraine are restricted significantly as it compares to historical norms, meanwhile Russia looks to export still what was expected under its previously communicated quota system. As Ukraine struggles to export what it needs to, it continues to build domestic stocks, and thus reducing the potential of further export restrictions. The next question remains what does new crop supplies look like, but assuming a strong reduction and with continued limited export potential, I don’t think we could find additional export restrictions put in force. Russia’s new crop looks pretty good right now as well, and given their likely slower than normal new crop exports as well, expect stock levels to be sufficient to void the thought of further export restrictions. Other markets such as EU, U.S. and Canada, no fear remains of any export restrictions as they fully let the free market prevail and solve its own issues. Importing nations can indeed reduce any restrictions to allow the ease of imports more freely IMO.
Unfortunately, we are getting a bit more use to restrictions/stipulations as we come off COVID, but moving forward I think weather plays the primary role for further restrictions that could be seen outside of the Black Sea. The market has done a good job already of trading and solving the war implications, but adverse weather would be another hit to the markets, of which some origins will simply not be in a position to deal with given their current status.
- What are your expectations as to the trade with Russian grain? Which countries are the most dependent on Russian grain and which countries may give up importing Russian grain?
For now trade remains with the pre-existing quota system, but point is product is still moving. The key markets right now remain Turkey, Egypt and Iran, and likely will remain so as we get into new crop. Food products are exempt from full sanctions as it remains right now, but this does not negate freight risks and freight costs/insurance that remain tough to calculate. I also do not see sanctions easing at all, and thus sanctions fully remain a large hurdle to navigate for payment for Russian goods, but at the end of the day price does its job and demand will find ways to buy the cheapest origin regardless of hurdles present. Other nations such as Saudi, Algeria and other MENA origins can shift efforts to EU and Baltic supplies.
- Where is a roof of wheat and corn prices? What are your expectations as to the development of wheat and corn prices until the end of the current season? Do you have any thoughts as to the price development next season, particularly given all the developments in Ukraine (no exports, forecasts of sharp production decline, etc)?
- This indeed is the pending question for the markets to debate right now. How much does Ukraine plant for spring crop? Will exports be flowing properly for wheat come summer time? What will fall harvest and exports look like? The answer already varies greatly, but likely over the next 4 weeks or so we should be able to answer this with a bit more confidence. We have inflationary concerns brewing in the markets as well which continues to keep the speculator focused on the agricultural markets. Wheat prices in Chicago and Kansas are a bit off the March highs already, but assuming the war remains and global trade flows are changed as a result, new highs can be seen with time, can we reach $15+? Yes, I think we can, especially if weather pokes its head again. As I write, Matif wheat is pushing fresh highs, so where is the high here? Seasonally we tend to peak in April/May for Matif, but this year of course is a bit different amid the lack of proper Black Sea presence expected for Q1-Q2 for new crop. At this rate September Matif is working to 400 EUR/t, can we push 450 EUR/t based on continued war/weather risk premium? Yes, I think so, this also puts Black Sea prices to those levels as well.
Chicago corn is pushing decade old highs as I type as well, and can we see $8.50-9 Chicago levels? Yes, demand rationing is very small at these prices as ethanol and export markets still look with positive margins. We need to see demand rationing efforts before we can consider a legit top is in the market. New crop Chicago sits at $7.50, a very rich level, next level there remains $8 and with any legit weather stress in the U.S. amid a severely reduced Ukraine, we can also see $9 new crop prices as well. Black Sea prices are a bit tricky, with the continued war, Ukraine corn prices would continue to be under pressure, as there remains only one outlet to the West to sell supplies.
Of course, the bear risk in the market remains the immediate halt to the war. Ukraine farmers have a lot of supplies to sell and I am sure they will be willing to sell at a cheap level to simply get cash. The other bear risk remains perfect weather, but as it remains right now it seems these two events have a small chance of happening. Also remember though, high prices cure high prices – yes the farming industry is cyclical and takes time to get new supplies, but there is a futures market for a reason!
- What is your forecasts of the supply&demand balance of wheat in the world in 2022/23 MY?
- Many moving pieces here of course. 21/22 world wheat production remains at 779 mln tonnes with carryout at 278 mln tonnes. We at StoneX put global 22/23 world wheat production at 776 mln tonnes with carryout at 268 mln tonnes, the USDA will give us all their first looks at new crop data on May 12th, 2022.
- What can you say about the prospects of biofuel segment? Can we face the situation, when the eco-agenda fades into the background to free some volumes of corn and vegetable oils for food and feed needs amid the shortage of supply caused by the war in Ukraine?
- Yes the food vs fuel debate remains a legit argument right now, but we must remember the market incentivized an massive global expansion of corn supplies thanks to the use of ethanol. If you look back at the expansion of Ukraine corn production, it fully coincides with the start of the ethanol era in U.S. as well. Anyways, as it remains right now for example, nearly 35% of U.S. corn production is used for ethanol. Brazil uses roughly 11% of corn production for ethanol and 55% of sugar production for ethanol. U.S also uses nearly 40% of bean oil for biofuels as well, so clearly the debate can remain when we hit historic prices like we currently are. At the same time though as most are aware, energy prices are also pushing higher, so if you cut back the use of biofuels you will increase further the price of gasoline. You might be able to argue doing that would indeed be more of a supply shock to the system vs that of what the market is currently already use to on the corn, sugar, bean oil demand side. What I mean by that is the demand side has been use to the ethanol and biofuel demand pull on supplies for the past few decades, and thus it’s just when supply gets squeezed that the debate remains legit. So which one hits the consumer harder? Increased energy prices at a faster rate, or a steady climb in food prices? (food inflation is also heavily influences by energy, weather, supply chain constraints etc ) At this point, it seems like it’s a double edged sword either way you look at it.
Interesting enough, President Biden recently has allowed the sale of e15 for summer months to help ease the price of gasoline to consumers. In principle though this effort will mildly reduce consumers stress.
- What is your opinion about the overall influence of the war on the development of agricultural market in 2022/23 MY?
- I think I answered this above, but in short its catastrophic and will have a further ripple on global food prices. Price action is heavily influenced by the longevity of the current war, if its solved and a peace agreement/ceasefire can be found, then sure all stress is relieved, but if the war continues on thru summer and into fall, we can have further fears evolve on global supplies. Current prices are doing their job though for global farmers to plant to the max, and this too takes time to develop. It’s a market and we go in cycles, so at some point these max plantings may indeed find cheap prices which will encourage farmers to reduce again, but first we need to see an end to this war.
By Inna Stepanenko
