Grain trade reacts to unrest in Ukraine

Grain trade reacts to unrest in Ukraine

Continuing tension in Ukraine spreads fear in markets, pushing up prices ahead of March USDA crop reports.

THE political situation in the Ukraine continued to be the focus of concern last week as the world waited for Russia's next move.

Contrary to what most countries believe, Russia continued to deny that it had troops occupying the Crimean Peninsula.

Just last Thursday, the regional parliament of the Crimean Peninsula decided that it would split from the Ukraine to become part of Russia. A referendum is scheduled for March 16 so local voters can decide whether to join Russia or remain somewhat autonomous as part of the Ukraine.

With the situation far from over, Rice Dairy market analyst Jerry Gidel said the initial concerns for the agriculture industry involved wheat and corn export shipments from various Black Sea ports being delayed or canceled because shipping companies did not want to put their vessels at risk.

Second, he said others voiced concerns about spring planting and production problems, but he doesn't expect that these issues will occur unless this situation escalates sharply in the next six to eight weeks.

"Events in Ukraine will have a direct impact on U.S. farmers in the international marketplace," said Tom Sleight, U.S. Grains Council (USGC) president and chief executive officer. "The council is a global organization and has staff and consultants around the world representing the best interests of the U.S. grain trade."

"Ports are open, and vessels are loading, but shipments are becoming increasingly difficult," reported Cary Sifferath, USGC regional director for the Middle East and Africa. "We're seeing farmers holding grain to hedge against a devaluing currency. We hope for a peaceful and speedy resolution of Ukraine's crisis, but the instability is creating opportunities for additional U.S. exports to North Africa, the Middle East and China."

Ukraine reported a record corn harvest in the 2013-14 marketing year of more than 30.9 million metric tons (1.2 billion bu.). The U.S. Department of Agriculture projected in February that exports for the year will reach 18.5 mmt (728 million bu.).

Sifferath estimated that approximately 15 mmt of this total had already been shipped, leaving about 3.5 mmt in projected exports between now and June. It's uncertain how the turmoil will affect these shipments.

Ukraine's winter wheat and barley crops were planted before the onset of the crisis, but corn planting is due to start in the next 30-45 days, and credit availability may become an issue.

"The economic instability will affect Ukrainian farmers looking to plant this year's crop," Sleight said. "Ukraine is in a tough spot financially, and planting season is just around the corner. The council will continue to monitor this situation closely."

Ukraine Agriculture Minister Ihor Shvaika recently told Reuters, "I don't see major problems with the sowing (campaign) as of now. We will do everything so the area for spring grains does not fall, and it will not fall."

Some traders were reluctant to enter into new contracts while tensions between the Ukraine and Russia escalated, Shvaika said. "We are doing everything to resume the process," he added.

"Increases in Ukrainian corn prices and political uncertainty should keep U.S. corn competitive into North African markets, including Egypt, Morocco, Algeria and Tunisia," Sifferath said. "We wish the Ukrainians a peaceful solution to their political crisis, but in the meantime, U.S. price, quality and especially reliability are critical factors."

Archer Daniels Midland Co. (ADM), which has port facilities, an inland grain elevator system and an oilseed processing plant in the region, said in a statement last week that it had not seen any significant impact to business and continues to monitor the situation.

"Our primary concern is the safety of our employees, all of whom are safe," ADM noted.

According to USGC, Venezuela has also been experiencing growing economic disruption and increased tension as a result of an escalating confrontation between protestors and the government. While many demonstrations have remained peaceful, some have led to violent clashes with the police. Despite having the world's largest oil reserves, the country suffers from the highest inflation rate in South America and chronic shortages of food and household goods.

"Venezuela is a key importer of U.S. corn and, despite its difficulties, a valued market," said Kurt Shultz, USGC regional director of the Americas. "Lack of access to U.S. dollars and spiraling inflation mean that corn imports will take a hit when and if the government runs out of hard currency to pay debts. This is a real problem not only for U.S. producers but also for our loyal customers in the country."

 

Trade estimates

Ahead of USDA's March 10 "World Agricultural Supply & Demand Estimates" report, the trade was expecting the report to show that U.S. corn ending stocks would increase from 1.481 billion bu. to 1.488 billion bu. and that wheat ending stocks would increase from 558 million bu. to 570 million bu., while soybean ending stocks were expected to decrease from 150 million bu. to 141 million bu. (Table 1).

As for world ending stocks, the trade expected USDA to report a decrease in soybean, corn and wheat supplies.

Rainy weather in South America over the last month and a brutally cold winter in the U.S. had the trade predicting lower corn and soybean production numbers for South America (Table 2) and lower crop ratings for U.S. wheat.

While lower numbers are expected for South America, Jack Scoville, a vice president at Price Futures Group, said it's important to realize that the region still had a record crop. He suggested that the trade numbers were underestimating production from Brazil and Argentina.

 

Market recap

Corn, soybean and wheat prices climbed steadily last week due to a variety of different factors affecting the markets.

Events in the Ukraine created fear and uncertainty in the corn and wheat markets.

According to Arlan Suderman, senior market analyst for Water Street Solutions, grain markets gained strength last Tuesday because of the situation overseas. He said chart signals that were turning positive combined with lower trade estimates for South American production numbers were also part of the equation for last week's higher prices.

Suderman pointed out that money also continued to flow into the commodity markets, lending them strength.

However, despite strong prices last week, Suderman said the markets could very easily go the other way.

"The markets are fickle and could go the opposite direction," Suderman emphasized. "The big question continues to be what (Russia's President) Vladimir Putin is going to do in terms of Ukraine. Putin has said there is no need for military force, and he did order troops to go back to the barracks."

Suderman emphasized that despite those reports, Putin has also claimed that his troops are not occupying the Crimean Peninsula.

"It's kind of a passive-aggressive behavior by Russia right now, so the grain trade is still very nervous because there is a lot at stake," Suderman said. "Worst-case scenarios are what traders are thinking about right now."

While the risk of exports out of that region being shut down for a prolonged period of time is still relatively low, Suderman said the market, combined with money coming into the commodity sector at large, is choosing to focus on the issue.

The Ukraine and Russia are major export competitors through the Black Sea. Suderman explained that if a broader military conflict were to break out and exports were shut down in that region, it would have huge implications for the global grain balance sheet.

"Suddenly, we would find ourselves in need of finding other sources of corn and wheat that would likely be a significant boost to U.S. exports and tighten up our balance sheets for both of those grains," he explained.

Nearby corn prices last Monday closed at $4.64/bu. and had climbed to $4.8575 by Thursday.

It was the same story for soybeans and wheat, as well.

Nearby soybean prices closed at $14.0725/bu. last Monday, and by Thursday's close, prices had reached $14.375.

Wheat markets opened at $6.10/bu. last Monday, 11 cents higher than the previous Friday's close, and by last Thursday's close, the price was significantly higher, at $6.415/bu.

 

1. 2013-14 ending stocks, billion bu.

 

March

Trade

USDA

U.S.

est.

range

Feb. est.

Corn

1.488

1.431-1.656

1.481

Soybeans

0.141

0.130-0.150

0.150

Wheat

0.570

0.549-0.615

0.558

World

Corn

156.27

154.80-158.40

157.30

Soybeans

71.46

69.50-72.90

73.01 

Wheat

183.65

182.10-185.00

183.73

 

2. South American 2013-14 crop production, million tons

 

March

Trade

USDA

Argentina

est.

range

Feb. est.

Corn

23.35

20.80-24.00

24.00

Soybeans

53.50

52.70-54.00

54.00

Brazil

Corn

69.03

65.45-70.50

70.00

Soybeans

88.14

86.50-90.00

90.00

Sources: Reuters, USDA.

 

Volume:86 Issue:10

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