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)

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.

Close To Break
Front-Month CBOT Wheat (USc/bushel, weekly) & RSI (below)

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.

Massive Sell-Off
Ukraine - Exchange Rate (UAH/US$)

Ultimately, we believe the dire economic conditions in Ukraine will have a longer-term impact on wheat (and corn) supply and prices than the current stand-off between Ukraine and Russia. Recurring devaluations of the Ukrainian currency, heavy external debt loads and low foreign reserves have worsened the country's default risk profile, making a financing package from the IMF or the EU more pressing. In that context, we believe credit conditions, which were already poor in the country and which have prevented farmers from investing in agricultural inputs, infrastructure and storage, will worsen

Moreover, a financing package to prevent a collapse in the country's finances will take some time to negotiate. This is because the amount required to cover 2014 and 2015 is significant (about US$35bn) and because international lenders will ask for specific economic reforms to be implemented before they release any money. One of these reforms will be a reduction in government subsidies for gas prices (for households, but this will have an effect on businesses as well). This, combined with the recent decision from Russian energy supplier Gazprom to increase the wholesale export price it charges to Ukraine after the protests forced pro-Russian President Viktor Yanukovych out of power, will put a strain on companies operating in the country, including grain producers, traders and food processors.

Russia Outperforming Ukraine
Ukraine & Russia - Wheat Production Growth (% y-o-y)

We do not see similar economic risks in Russia, as we do not expect the US and the EU to implement sanctions that would be particularly damaging to the Russian economy. These countries very likely would be concerned that Russia would react to sanctions by restricting gas supply to Western Europe, where countries such as Germany and Italy in particular would suffer. As a result, we believe large agribusiness companies such as grain traders, input companies and dairy producers will continue their push into the country, and production and exports are likely to continue undeterred. Over the long term, we forecast Russian wheat production growth (at an annual average of 11.8% between 2013/14 and 2017/18) to outperform Ukrainian production growth (at 7.1%).

Relatively Small Share Of Global Supply
Select Countries - Wheat Exports (% of global)

We expect wheat prices to eventually moderate over the Q314, when concerns over the tensions between the two countries are expected to lessen and when the 2014/15 harvests in the US, Canada, the EU and other major producers flood the market with additional wheat. Russia and Ukraine together represented only around 16.6% of global wheat exports in 2013/14, which will limit their impact on prices once supply from other producers comes online. Also, we forecast strong wheat harvests for both countries in 2014/15; should disruption to trade remain minimal and because plantings are already on the ground, upside risks for prices in the coming months will be limited. We forecast prices to average USc610/bushel in 2014 and USc650/bushel in 2015.

Russia Wheat Estimates
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
BMI Russia Wheat Production* 49,400 63,700 61,770 41,508 56,240 38,000 54,400 56,200
USDA Estimates 49,400 63,700 61,700 41,508 56,231 38,000 54,400 -
Wheat Yield (tonne/ha) 2.1 2.4 2.3 1.9 2.3 1.7 2.3 -
Wheat Area Harvested (mn ha) 23.5 26.1 26.7 21.7 24.8 21.3 23.3 -
% Of Global Production 8.1 9.3 9.0 6.4 8.1 5.8 7.3 -
% Of Global Exports 10.7 12.7 13.5 3.0 13.7 8.0 10.3 -
BMI Global Wheat Production** 612.0 682.7 684.1 653.0 695.0 656.3 711.6 719.3
IGC Global Wheat Estimates** 612.1 682.8 684.3 650.0 672.0 656.0 708.0 na
Note: *('000 tonnes) **(mn tonnes); Source: USDA, FAPRI, IGC, BMI (FY15 = 07/2014 to 06/2015)
Russia Wheat Calendar
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
H H H P P P
Note: H=Harvest, P=Plantings; Source: BMI, USDA, IGC

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Geography: Global, Latin America
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