BMI View: Ongoing military tensions between Ukraine and Russia will leave grain prices supported for the remainder of H114, despite record levels of Ukrainian output and exports in 2013/14. This is due to the risk of protracted violence in major wheat-producing regions. We believe the main consequence of the conflict will be on grain production in 2014/15, which we forecast to fall as a result of reduced credit available to Ukrainian farmers, which will in turn reduce input usage.
At 29.4mn tonnes, grain exports from Ukraine in 2013/14 are at an all-time high due to the country's record crop harvest in 2013/14. Ukraine has significantly increased grain production, particularly corn, in recent years as it has enlarged its harvesting area. Good weather in 2013/14 aided yields. We estimate that wheat, corn and barley output rose by 39.5% year-on-year (y-o-y) to 60.8mn tonnes in 2013/14. We believe that the weakness of the hryvnia has also encouraged farmers to bring their produce to the global market while exchange rates remain favourable.
|Ukraine - UAH/USD Exchange Rate|
Despite high levels of Ukrainian exports, the risk of military intervention in eastern and southern Ukraine is keeping global wheat prices supported. Violence has escalated over the past two weeks after the Ukrainian government has said it will use force after pro-Russian demonstrators in Donetsk, Kharkov and Lugansk seized government buildings and announced their intention to hold referendums on self-determination. Our core view is that civil war or military intervention from Russia is unlikely to happen, though global markets remain wary of developments.
The eastern and southern regions of Ukraine are the largest wheat-growing areas, with these regions most at risk from fighting. If protracted violence were to happen in the oblasts of Zaporozh'ye and Dnepropetrovsk (the major wheat-producing regions north of Crimea), Ukraine's wheat output could be damaged.
|Great Risk In Wheat-Growing Regions|
|Ukraine - Russian Speakers As % Of Population (LHS) & Major Wheat-Producing Regions|
Though these risks are keeping grain prices elevated, we do not foresee a serious decline in Ukraine's grain production or exports as a direct result of the Russia situation. Instead, we believe the main effect will be on 2014/15 grain output, as Ukrainian farmers are affected by poor credit conditions. Devaluation of the Ukrainian currency, heavy external debt loads and low foreign reserves have worsened the country's default risk profile. Credit conditions in Ukraine have been difficult for many years, and the recent crisis will further prevent farmers from investing in agricultural inputs and infrastructure.
Furthermore, Russia appears unwilling to wind down its attempts to destabilise Ukraine, both economically (through gas prices and trade blockades) and politically through support of separatist movements. These are pushing Ukraine to the brink of economic collapse. Our Country Risk team believes that Russia and Ukraine's economic ties are sufficiently strong that recent IMF funding will be insufficient to prevent Russia from driving Ukraine to economic ruin if it desired (see 'Ukrainian Crisis Enters New And Dangerous Phase', April 14).
Ukrainian farmers have already been forced to use cheaper seeds or cut the amount of fertiliser they can purchase, while others struggle to get loans to replace old equipment. We believe monetary assistance from the IMF will be inadequate to cover all requirements on the ground. We therefore believe yields will broadly decrease next year, and forecast a fall in wheat, corn and barley production of 7.3%, to 56.4mn tonnes.
|Wheat Production, '000 tonnes 2||15,761.0||22,280.0||22,000.0||20,000.0||20,500.0||21,000.0|
|Wheat Consumption, '000 tonnes 2||11,400.0||11,500.0||11,845.0||12,425.4||12,959.7||13,439.2|
|Corn Production, '000 tonnes 2||20,922.0||31,000.0||27,400.0||27,948.0||28,507.0||29,077.1|
|Corn Consumption, '000 tonnes 2||8,100.0||10,100.0||10,110.1||10,120.2||10,170.8||10,323.4|
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 National Bank of Ukraine; 2 USDA.|