Black Sea in it for the long haul

Black Sea wheat exports are projected at an all-time high this year, and there is good reason to have confidence in this forecast.

During the 2015/16 marketing year, the U.S. Department of Agriculture (USDA) estimates that the states of the former Soviet Union excluding Latvia, Lithuania, and Estonia (FSU-12) will export a record 45 million tonnes of wheat.

Together, Russia and Ukraine account for 75 per cent of wheat production and 85 per cent of wheat exports in FSU-12.

If USDA’s October exports forecast is realized, the percentage of global wheat trade accounted for by FSU-12 in the 2015/16 marketing year will reach an all-time high of 28 per cent, narrowly topping 2009/10’s record of 27 per cent.

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World wheat production has nearly doubled over the past 30 years, though the percentage by FSU-12 has been relatively stagnant.
But since the mid 1990s, Black Sea farmers have nearly quadrupled both their share of world wheat exports and the percentage of yearly supply that they export.

This has introduced previously nonexistent competition for major wheat exporters including the United States, which used to be the breadbasket of the world. That title now belongs to the Black Sea, as it has emerged as the largest wheat-exporting region on the planet.

With record wheat production expected this year out of the Black Sea combined with favourable trends in prices and forecasts, the record export forecast is not hard to believe. And the trend has staying power.

Burst onto the market
Historically, the U.S., Canada, Europe, Argentina and Australia made up 96 per cent of the wheat market.

But since 1980, market share trends in the five are either flat or decreasing, most notably in the U.S., which is expected to account for only 14 per cent of global wheat exports this year.

In the meantime, FSU-12 has crept into the picture and this year’s market share projection of 28 per cent towers over the EU at 21 per cent. The EU is expected to export 33 million tonnes of wheat this year compared to FSU-12’s estimated 45 million. That would easily top last year’s record of 40 million tonnes. USDA estimates FSU-12 at up four per cent on the year, with Russia up by three per cent and Ukraine up a whopping nine per cent.

Ukraine has not only increased wheat exports every year, but has done so by an average of 30 per cent per year, even with the drought-marred harvest of 2012. Net volume over the same period has also increased in Russia but by half the rate.

Thomson Reuters data seemingly confirms Ukraine’s strong charge towards the record 15 million-tonne target for the current year. Between July 1 and Oct. 20, wheat exports were up by nineper cent over the same period in 2014.

Russia is a bit more complicated. Although Thomson Reuters data suggests wheat exports since July 1 are nearly flat on the year, other sources put them down by as much as 18 per cent from 2014.

A year-on-year decline in Russian wheat exports to date would most likely be blamed on the export duty, which was introduced in December 2014. Despite the tax being unexpectedly introduced mid-marketing year in 2014/15, total Russian wheat exports ultimately overshot initial expectations despite the downside fears. And the gentle strengthening in the rouble over the past two months may have helped attract more buyers.

On Oct. 28, the Russian Agriculture Ministry announced the duty could be cancelled or modified as soon as the foreign exchange rate has stabilized. If changes come relatively soon, exports could drastically pick up pace assuming that cash prices also remain stable.
Cash prices at major ports worldwide, which are at relative five-year lows, seem to reflect the abundance of global wheat supply and therefore support larger export volumes.

Ukrainian and Russian prices have rendered Black Sea milling wheat as particularly attractive when compared to the U.S., as it has been offered at a discount of between $10-$50 since May. And Russian export prices are up to 20 per cent lower than they were last year at this time, perhaps somewhat easing the duty headache.

Average wheat yields in Russia and Ukraine have been on a convincing upward trend over the past decade and combined with stable sown area, Black Sea wheat production will continue to be large and competitive going forward, barring an extreme disruption such as widespread drought. Unless the situation significantly changes, the Black Sea is here to stay and will likely continue to cement its seat at the top of the wheat market over the coming years.