Global Wheat Outlook: Black Sea Focus
BMI View: We believe the recent escalation of military tensions between Ukraine and Russia will leave wheat prices supported in the short term, as both countries will be crucial in terms of supplying the seasonal trough currently seen in the global wheat market. Over the longer term, we see more risks from a collapse in Ukraine's finances than from the current stand-off between the two countries. In addition, we expect strong wheat output from other large producers for the coming 2014/15 season, which will help wheat prices lower in the medium term (at USc610/bushel in 2014).
We believe the recent escalation of military tensions between Ukraine and Russia will leave wheat prices supported in the short term. First, the Russian military occupation of Crimea is likely to limit Ukraine's potential to export from the southern ports of Odessa and Illichivsk. This will be compounded by the recent sell-off in the Ukrainian hryvnia, which pushed farmers to hoard their supply instead of selling it on global markets despite strong local stocks. In addition, if the region is declared a conflict zone by insurance companies, the insurance premium on shipping companies operating at Ukrainian ports (and even Russian ports if the entire Black Sea region becomes involved)could discourage trade out of the concerned ports. Second, the US and the EU are considering economic sanctions as a way to pressure Russia; the countries have said Russia's actions violate international law and the sovereignty of the Ukraine. This could limit Russia's wheat exports in the coming months at a time when the country is left with hefty stocks and export prices are relatively competitive.
Both Russia and Ukraine will be crucial in terms of supplying the seasonal trough being experienced in the current wheat export season. For the 2013/14 season, which will end in June 2014, we project a global wheat surplus of 5.8mn tonnes, compared with a 30.3mn tonne deficit in 2012/13. This sharp rebound in supply has been partially driven by the 43.0% year-on-year (y-o-y) increase in wheat production from Russia, Ukraine and Kazakhstan combined in 2013/14. Even if the Russian harvest was delayed because of unfavourable weather conditions during plantings, wheat output was stronger than expected and came onto global markets in December, providing downward pressure on tender prices, especially from Egypt. Similarly, Ukrainian wheat stocks are still high by recent standards and could support exports in the medium term.
|Close To Break|
|Front-Month CBOT Wheat (USc/bushel, weekly) & RSI (below)|