Nothing like a few rumours and a dash of speculation out of the Black Sea region to generate a modicum of market uncertainty and fire up grain prices. And that is precisely what we saw in the wheat market late last week as Russian wheat export policy became the dominant theme, pushing Chicago futures higher for three straight sessions.
The March contract on Chicago hit a 10-week low on Tuesday but rallied almost 8 per cent or AU$22 per metric tonne over the next three days to close the week at the equivalent of AU$300 per metric tonne. Funds were the big buyers on Thursday and Friday, swinging back onto the long side as the rumours gained momentum.
An export quota of 17.5 million metric tonne (MMT) for wheat, rye, barley and corn running from February 15 to June 30 is old news, is already factored into the market and was unlikely to have a massive impact on trade. But speculation intensified last week that Russian officials were pondering the imposition of a wheat export tax proposed by domestic consumers in a bid to stabilise domestic prices.
Details around the structure and size of the tax were a little sketchy but speculation centred around it running in conjunction with the proposed export quota. Officials were apparently considering a unified export tax for all classes of wheat set at 2,000 roubles, or around AU$36.30 per metric tonne. Another rumour put the tax at €25, or AU$41.50 per metric tonne. The export tax on rye, barley and corn will be set at zero for the time being.
It was also suggested that should export volumes exceed the 17.5MMT quota, the tax on all grains will be raised to as much as 50 per cent of the free-on-board (FOB) export price, but not less than €100, or AU$166 per metric tonne.
Then on Monday of this week the rumours became fact. With President Putin weighing in on the argument a decision was always going to be quick and in the end the agriculture ministry went with the €25 option. It was a case of buy the rumour, sell the fact as Chicago futures gave up all of Friday’s gains after the decision was announced. A classic ‘bull trap’ as a colleague described it before the Russian announcement; and he was right!
The Russian food price index has risen almost 4 per cent since the beginning of the year, but cereal prices are up 20 per cent. And that comes after Russian farmers have just finished harvesting their second-biggest wheat crop on record. But smaller crops in the European Union and Ukraine has raised the demand for Russian wheat from Africa and the Middle East which has exports running at record pace, spurred by a weakening rouble.
Russia is the world’s biggest exporter of wheat, and from the beginning of the 2020/21 marketing year on July 1 to December 8, Russia has exported 23.5MMT, up 21% compared to the same period of the last year. Exports last month alone topped 4.2MMT, more than 33 per cent ahead of the 4-year November average. Barley exports for the season to December 8 totalled 3.5MMT, a 70% increase on the corresponding interval in 2019.
Leading Russian agriculture consultancy Sovecon has raised its wheat export forecast for the 2020/21 season by 1MMT to 40.8MMT. This was on the back of the high export pace and a 0.9MMT increase in its production estimate to 85.3MMT. Last week’s USDA production and export forecasts came in at 84MMT and 40MMT respectively.
Russia has a history of disrupting global grain markets by means of export restrictions and duties. They introduced a wheat export duty in 2007 to tackle rising food costs, pushing the global wheat price to record levels. Then in 2010, Prime Minister Putin banned the export of all grain after millions of hectares of Russian wheat and barley withered in a severe drought, driving global prices to their highest level in two years.
This is the exact scenario that concerns Russia’s Union of Grain Exporters which petitioned the government against the proposed tax for fear it would raise global wheat prices. They maintained that the grain export quota should be sufficient to protect Russia’s domestic market and that there is adequate global supply to meet import demand.
There was also concern within the agriculture ministry that the tax will come straight out of the pockets of the Russian farmer. Elevation margins have been squeezed in recent weeks putting exporters in quite a precarious position. If they want to buy grain to compete in the export market beyond February next year, they will have to lower their grower bids. And that is exactly what they did toward the end of last week, catching the farmers a little off guard.
With the details of the export restrictions now known, Russian exporters will most likely ramp up their wheat export program in a bid to move as much as possible before the tax cuts in next year. The key will be how the Russian farmer reacts. Are they willing to take a haircut when selling, especially when the price in rouble terms is still quite attractive? Or will they simply vote with their feet and shut up shop until prices recover? Who will be the last to blink?
New crop wheat conditions also appear to be having a significant impact on market sentiment within the Federation at the moment. The dryness is definitely a concern, and eventually, the winter will kick in. With it come temperatures cold enough to damage areas without snow cover, especially in regions where the plants are already stressed.
Sovecon slashed its new crop wheat production forecast from 81MMT to 76.8MMT last week with the winter crop reported to be in its worst condition in more than a decade. As much as 22 per cent of the planted area is said to be in poor condition entering the winter dormancy period. Sovecon said that yields could fall below the recent average and the winterkill area may increase to as much as 3.2 million hectares (Mha), compared to 1.8Mha last season.
Drought conditions persist through Southern Russia, the lower Volga River basin and into Western Kazakhstan and the forecast holds very little hope of meaningful falls for the second half of the month. Temperatures are expected to be average to above average over the next two weeks, which may melt some of the snow currently on the ground.
While there is not a major threat of damaging temperatures in the lead up to Christmas, timely snowfall will be needed to shield winter crops from potential damage when the colder weather returns. As long as the dryness persists concern over next year’s harvest will remain at an elevated level. And this will weigh on grower selling sentiment.
The tax rumours will no doubt spike interest in Australian wheat, particularly for the first half of 2021 as it remains the cheapest origin in the world. The prospect of a Russian wheat export tax should enable Australian exporters to extend their tentacles a wee bit further in search of export demand for the record crop currently hitting the bins.
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