Tight supply
On the back of a major supply disruption in grain markets as a result of the Russia-Ukraine conflict. We look at the potential for alternative sources to ease supply and its impact on the freight market.
Since 24 February, when the conflict began, CBOT wheat and corn prices have increased by 29.6% and 10.5% to $12/bushel and $7.7/bushel. The difference in price increases is a result of the importance Russia and Ukraine are to global supply in each of these markets. In 2021, only 16.3% of seaborne corn liftings were loaded in Ukraine whilst shipments from both countries represented 32.4% of total wheat loadings. Prices are also factoring in tight supply in the next marketing year due to concerns less crop is sown in Ukraine in the coming months. As corn planting is set to begin this month, the Ukrainian government have stated sowing will begin only in safe areas but the extent of these safe areas is unclear. Mass evacuations in the country may also contribute to reduced planting this year with Ukrainian farmers reportedly already facing labour shortages.
Shipments of Black Sea grains are expected to remain low for the time being as ports in the Ukraine remain shut and sanctions placed on Russia provide limited buyers for Russian farmers. Despite Ukraine Railways stating it would facilitate the transport of grains out of Ukraine by train to ports in nearby countries, the government has announced it is creating a state-funded food reserve. As a result, the majority of these volumes are unlikely to head elsewhere to other ports.
Wheat alternatives
In Australia, there is set to be another bumper crop year for wheat but the country is facing several bottlenecks restricting a ramp up in shipments. Although farmers in the country have sought to take advantage of higher prices, ship loaders have found it difficult to get more equipment. Meanwhile, with Australian unemployment at low levels, trucking companies are also facing constraints, finding it difficult to obtain more drivers. As a result, wheat shipments came in flat YoY over the January — February period, totalling 4.3m tonnes. Going forward, however, we expect an 8.1% increase YoY in wheat shipments out of Australia in 2022. This is based on another record crop and greater seaborne demand during the summer months when consumers would typically look to the Black Sea for supplies.
In the US, which exported 19.6m tonnes of wheat in 2021, farmers have been experiencing dry conditions throughout the winter wheat growing season. Subsequently, production is expected to decline by 10.0% to 44.8m tonnes in the 2021-22 marketing year according to the USDA, the lowest level of wheat production over the past 10 years despite similar planting areas. As a result, we estimate a 12.1% YoY decline in wheat shipments to 17.2m tonnes from the US in 2022.
With grain prices beginning to move higher towards the end of last year, India has been one source that has looked to export more grains. Indian wheat exports have significantly ramped up towards the end of 2021 and into 2022. In December, the country shipped 607k tonnes of wheat, the highest on record. Together with wheat, the country has also increased shipments of sugar and rice for similar reasons. Overall, these volumes are minor compared to the reductions in wheat shipped from the Black Sea.
India has kept hold of its large wheat inventories in previous years as security against droughts which it has experienced in the past. Farmers also earn high guaranteed prices from the government who then store it, meaning historically Indian prices were uncompetitive in the seaborne market.
Further, the short durations to nearby customers such as Bangladesh and the UAE, typical buyers from Russia, make India an ideal choice for buyers looking for alternative supply and reduce their cost of freight, particularly as bunker prices remain elevated.
Corn
On the corn side, the ongoing situation in Ukraine is less impactful on global supply, as is clear with the comparatively lower price increases compared to wheat. In 2021, Ukraine accounted for 13.7% of total seaborne demand from corn compared to 31.6% in wheat.
Before halting port operations, Ukrainian corn exports totalled 3.9m tonnes in January, the highest monthly total on record. The October—January period historically represents an average of 53.3% of exports during each marketing year, based on last years total exports this would imply a loss of 10.4m tonnes of corns exports. However, if the situation improves in the coming months and ports were able to resume operations, we may see these volumes shipped later in the year. In terms of next year’s crop, the major risks include sowing, which as previously mentioned, is due to start this month and damage to growing areas.
The picture in Argentina and the US, the primary alternatives to Black Sea corn, is more positive than in previous years. Despite dealing with long periods of drought in Argentina, corn production is still expected to be a record 53m tonnes according to USDA estimates. In the US, the USDA also predict a bumper crop year for corn. In 2021, the country exported 58.1m tonnes, increasing by 28.0% YoY. As a result, we may see increased demand from these regions for grains from buyers who would typically purchase from Ukraine such as the Netherlands and Spain.
Outlook
Ultimately, it will be difficult for freight to see equivalent levels of demand from grains while shipments out of the Black Sea remain halted. In this scenario, where Black Sea harvests are limited for next year, we could see greater shipments out of other regions, such as Australia or the US to typical Black Sea customers. These regions may expand planting areas as a result to take advantage of elevated prices. One risk to this is the feasibility of scaling up production. This relies on increased machinery and equipment, labour and fertilisers, all that currently face shortages of their own, suggesting improving yields may be difficult going forward.
Unlike other commodities in which substitute volumes may be easier to come by, finding similar quantities in grain markets is difficult. This is largely down to long growing periods and crops only harvested once a year. While the situation remains as it is in Ukraine and sanctions on Russia continue, bulker demand from agribulk will likely slow in 2022 compared to the growth seen in previous years.
Mark Nugent