Ukrainian wheat market - results of the first half of the season

Rather limited number of proposals of large-scale grain lots on the market, the unstable economic situation and devaluation of the national currency rates, became the key factors influencing on price formation in the market segment of wheat in the first half of 2015/16 MY. The current article focuses on some challenges faced by the market participants, price trends, and the prospects for further developments.

Domestic market

According to APK-Inform data, in 2015/16 MY the general harvest of wheat totaled 25.7 mln tonnes, which became the record high index during several recent seasons. However, the qualitative indicators were estimated as rather low, due to permanent rains in the beginning of the season. So, the share of wheat of flour milling condition in the 2015 harvest structure did not exceed 5.3 mln tonnes. At the same time, in the first half of the season the prices for both milling and feed wheat continued activity increasing, due to rather unstable situation on the foreign exchange market, and dampening of grain sales by agrarians in the current terms of high demand.

Milling wheat

As a reminder, in July 2015 the starting supply/demand prices for 2-grade wheat varied within 2950-3550 UAH/t EXW and 2900-3500 UAH/t CPT respectively. But in August the grain prices began gradually rising, and by November the indices grew by over 800 UAH/t. In the reporting period, most flour milling enterprises faced difficulties while formed the required volumes of grains with high qualitative indicators. But agricultural producers did not hurry to supply the grain on the market, due to rather unstable situation with the foreign exchange market rates, and unfavorable forecasts for condition of winter wheat areas.

In January 2016, grain trading and purchasing rates on the market decreased, and the price situation somewhat stabilized. Representatives of export-oriented companies and flour milling companies did not show high interest in purchasing of wheat, because they managed to raw material stocks in advance. Thus, in the second half of January 2016 the bid prices for 2-grade milling wheat varied within the range of 3700-4300 UAH/t CPT, and the offer prices - 3800-4500 UAH/t EXW.

Feed wheat

It should be noted that in the first half of the season, agrarians continued quite actively supplying feed wheat on the market. Also, the constant rising of prices became the major trend in the market segment. So, in August 2015 the purchasing prices for 6-grade wheat varied within 2650-3150 UAH/t CPT, and the offer price - 2700-3200 UAH/t EXW. In the reporting period, trading and purchasing activity rates were quite high due to the sufficient number of grain offers, including large-scale grain lots. Since October 2015, the supply/ demand prices started rising, due to reduction of the number of grain offers and high competition rates on the market. So, until the second half of December 2015 the purchasing prices increased to 3250-3700 UAH/t CPT. In turn, the selling prices varied within 3300-3800 UAH/t EXW, up 600 UAH/t compared with August 2015, and remained unchanged until the middle of January 2016. In the period of mid-December 2015 -January 2016, the maximum purchasing prices slightly decreased to 3650 UAH/t CPT, due to presence of raw material stocks for further processing during the period of upcoming holidays, slight increasing of the number of grain offers and some strengthening of the national currency rates. Since the beginning of 2016 and until late January 2016, the market segment did not face significant price changes, while most purchasing prices were declarative only. It is worth noting that in the first half of 2015/16 MY, poultry producing companies fixed almost maximum prices in the market segment of feed wheat.

Export market: through hardships to new records

During several recent seasons, Ukrainian traders actively increased the shipment of grains on foreign markets, and 2015/16 MY was no exception. So, in July-December of 2015 Ukraine exported 10.5 mln tonnes of wheat, up 32% compared with the last season period (8 mln tonnes).

Despite the evident successes, traders still faced a number of problems. So, it was quite difficult to form large-scale stocks of milling wheat at the acceptable price. At the same time, the contracts for feed wheat sales somewhat compensated the reporting situation. Traders often purchased the grain at higher prices compared with grain processors, and did not experience any problems with formation of the required volumes.

We should note that in the beginning of 2015/16 MY, the market of milling and feed wheat faced the general bullish trend. In the CPT-port segment, in the beginning of July export-oriented companies gradually increased the bid prices for 2- and 6-grade wheat to 3500-3700 UAH/t and 3250-3550 UAH/t. In turn, on the FOB basis in the first weeks of the current season the offer prices for milling wheat with 12.5% protein content and feed wheat also increased, and varied within the range of 196-202 USD/t and 186-193 USD/t FOB, respectively.

Despite all difficulties, in the first months of season the wheat market showed high trading and purchasing activity rates, and gradual increasing of the export supply volumes from Ukraine. However, since October the export rates began declining, due to the world market influence and reduction of the number of grain offers in the country, caused by the devaluation processes of the national currency, estimations of the condition of winter wheat areas, etc.

Since December 2015 and until late January 2016, the price situation developed in the bearish trend, due to further reduction of trading and procurement activity rates, and low demand of importers. Thus, in the reporting period exporters reduced their purchasing prices. By mid-January, the prices usually varied within the ranges of 3650-3900 UAH/t and 3350-3750 UAH/t CPT-port for 2- and 6-grade wheat respectively. In turn, on FOB basis the offer prices fell to 183-187 USD/t and 173-178 USD/t FOB for milling wheat with 12.5% protein content and feed wheat respectively. At the same time, we noted that the demand for Ukrainian wheat significantly decreased, and usually the prices were declarative only.

Thus, a representative of an export-oriented company from Odessa oblast said: "According to our observations, milling wheat of Ukrainian origin is becoming less competitive on the world market. Thus, due to the limited number of grain offers and stable price growing on the domestic market, we came to conclusion that we fail to pass through the FOB prices. Generally, we faced the similar situation last year. But to date, the FOB offer prices for our milling grain reached the level of French wheat, and even exceeded it. At the same time, the European wheat has excellent high-quality characteristics, against the Ukrainian grain. Therefore, the absence of demand from importers caused the current situation on the market. It is important to say that low selling rates of agricultural producers played the key role, but not pressure of the foreign market".

Comment by Andrew Kupchenko, APK-Inform analyst:

In the first half of the current season, the exports of Ukrainian wheat broke the record - every month except November, Ukraine set new records of monthly shipments. Only in the first half year the exports totaled more than 10.5 mln tonnes, while in the entire previous season the index totaled 10.9 mln tonnes. It should also be noted that in the current MY wheat will return the position of major export crop in the grain segment. In 2015/16 MY, wheat exports will reach 14.1 mln tonnes, against 13.6 mln tonnes of corn exports.

Negative forecasts of the condition of winter crops areas contribute to reduction of competitiveness of Ukrainian wheat. Reduction of the planted areas under winter wheat and adverse weather conditions favor the reduction of forecast of winter wheat production in 2016, which we estimated at the level of 18.6 mln tonnes, down 28% compared with the current season. The spring wheat areas will increase to 190 thsd ha, against 172 thsd ha in 2015. As a result, the general harvest of wheat in 2016 will total 19.2 mln tonnes only, which will support the price trends.

UAC Information Center by information APK-Inform