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Update on the crisis in Russia

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Global markets have already factored in Russia’s recent exit from the old crop wheat market. The questions now are: When will Russian wheat become available again and how much will they have for export?

Russia, the fourth largest wheat exporter, essentially dropped out of the wheat export market when they announced in December an export duty which began Feb. 1. The collapsing Russian ruble, which fell more than 50% against the dollar, made Russian wheat the cheapest wheat, so it was exported at a record pace during the first half of the marketing year. Russia shipped 18 million tons of the USDA’s projected 20 million metric tons before the government’s tax on wheat exports went into effect.

The Russian government moved to curb its wheat shipments to cope with its currency crisis that raised food prices dramatically for its consumers. Russia is dealing with a plunging currency caused by weak oil prices and a potential recession after the U.S. and Europe imposed economic sanctions against Russia for their role in the Ukraine crisis. Russia retaliated with a ban on most Western food. Consumer food prices surged more than 15%, according to government reports. (See our special report on the Russian crisis sent to you just before Christmas.)

So far, the export levies have not stopped rising domestic prices as Russian farmers are holding onto their remaining wheat while the Agriculture Ministry is offering to buy cereals below market prices, analysts said. Grain stocks at farms, procurement and processing companies, were up 13% from a year earlier to 32.6 million tons as of Jan. 1, according to ministry data.

The export curbs will remain in place through June, although they could be extended if the 2015 harvest is too small, says the Russian Grain Union, representing the largest producers and traders. If the expectation for lower supplies drives up domestic prices and inflation, this could lead to an extension of the export tax.

Early projections for the total Russian grain output for 2015 are starting to come in with most estimates down 15% or more because of a perfect storm of poor winter wheat crop conditions, sharply higher credit rates (if farmers can even get financing), and higher input costs may force Russian farmers to plant less this spring.

One of the primary threats to Russian agricultural production this spring is the amount of credit available to growers, according to one machinery manufacturer. Russian farmers are heavily dependent on loans to finance crop cycles. Sanctions imposed on Russia are constricting lending and raising borrowing costs. State-controlled banks including Russia’s biggest farm lenders Russian Agricultural Bank and OAO Sberbank are on the sanctions list, preventing them from accessing Western capital markets.

Russia spent 121.6 billion rubles to support agriculture, according to government data. But they will not be able to help as much this year with significantly lower revenues from oil exports. Higher agricultural production costs may force smaller farmers to either reduce plantings or go out of business. Small producers accounted for about 25% of the country’s grain harvest last year, Russian government data show. With credit hard to obtain, farmers may use lower quality seeds and scrimp on applications of chemicals and fertilizer, resulting in lower yields.

But don’t write off the ability of the Russian farmer to overcome adversity. The Russians managed to increase their fall plantings to 16.2 million hectares, which is 1.2 million hectares more than in 2013, mainly in the Central district, according to the USDA. This was largely because inputs were purchased before the Russian ruble really collapsed later in the fall. Western companies supplying farmers with inputs for spring crops are raising their prices in rubles by 20% - 25% or more.

While the conservative USDA hasn’t made an estimate for the Russian spring plantings yet, other groups have been sticking their necks out with their predictions on this year’s Russian grain output. The influential analysis group SovEcon consultants sees 2015 grain output at just 86 million tons, compared to 104 million tons in 2014. This Moscow-based group rated the winter wheat crop well below the one in 2009, which preceded a 33% slump in wheat production at harvest the following year. Winterkill rates for Russia have ranged in recent seasons from 2.5% in a "good" crop year to 12.6% in the winter of 2009-10, preceding the poor 2010 crop.

The Interfax news agency reported an extremely wide range of estimates for the 2015 Russian grain crop of anywhere from 68 to 100 million tons. The low end is a worst-case scenario for winter crop weather. The high end is an optimistic scenario by the Russian state government.

About 21% of Russia’s winter grain crop is reported in bad condition at this point, according to the Russian Ag Ministry. About 3.5 million hectares (8.6 million acres) of winter crops, mainly wheat, may need to be replanted in spring if they don't recover from the fall's dry conditions, according to the Russian Grain Union.

Three private estimates for 2015 Russian wheat production range from 46.5 million tons to 54 million tons – all down from this year’s 59 million tons.

While the International Grains Council (IGC) did not give detailed country-by-country harvest estimates in its first forecast, the IGC did highlight the worsening prospects for Russia, for which it cut its estimate for wheat area at harvest by 800,000 hectares to 23.9 million hectares.

In western Russia, "after an unusually mild December, a cold snap in early January is reported to have caused some damage", the council said. However, the country's "deteriorating economic woes look like limiting farmers' ability for raising spring sowings. Given the country's high interest rates, currency depreciation and, as a result, soaring input costs, farmers may reduce plantings of spring wheat, which typically account for about half of the total," the IGC said. "With winterkill expected to be higher year on year after the relatively mild conditions of the previous season, the total harvested area is forecast to fall by 3%."

Bottom line: Russia watchers do not yet know how many acres will be planted this spring. Limiting factors are extremely tight credit and high input costs. After the rough start for the winter wheat crop, as we have been writing, odds favor a smaller total grain output than the bumper crop they harvested in 2014.

The Russian government also holds a wild card, and any actions it takes to try to keep wheat at home to control their soaring inflation will need to be watched as well. We’ll keep you updated on the Russian crop prospects as the season progresses.

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