Anna Buylakova: ‘Consequences of the special operation superimposed on market situation on world grain market’

Analyst of FG Finam — about the food situation and the impact of Russian and Ukrainian wheat on world markets

Vladimir Putin stated that 5 million tonnes of Ukrainian grain against the background of total production volume of 800 million tonnes cannot have an impact on world markets. The president stressed that Russia does not prevent the export of Ukrainian wheat and does not prevent the Ukrainian forces from demining the ports, which, according to him, they themselves mined. In the author's column for Realnoe Vremya, Finam analyst Anna Buylakova assesses how the actions of grain exporting countries are affecting the food situation in the world.

Russia and Ukraine are important suppliers in global food market

According to the estimates of the International Grain Council (IGC), the production of all cereals in the 2021/22 agricultural season worldwide will amount to 2,290 million metric tonnes (MT), and wheat — 781 million MT, or 34% of all cereals.

Russia and Ukraine are among the world's largest wheat producers. The Food and Agriculture Organisation of the United Nations (FAO) estimates that in the period 2016-2021 countries produced 14% of the world's wheat on average. In 2021, according to the FAO, the exports of Russian and Ukrainian wheat accounted for 30% of world exports. At the same time, the dependence of some countries on exports from Russia and Ukraine is much higher than from others.

According to UN estimates, about 44% of imported wheat to the African continent was imported from Russia and Ukraine in the period 2018-2020. The FAO estimates that more than 30 net wheat importing countries depend on more than 30% of Russian and Ukrainian exports. In some countries, this figure reaches 100%, as, for example, in Eritrea, or slightly less than 100%, as in Armenia or Mongolia. Thus, Russia and Ukraine are important suppliers in the global food market.

Wheat in Russia

In the current agricultural season, according to President Vladimir Putin, the grain harvest in Russia may amount to 130 million tonnes, of which 87 million tonnes — wheat. The Russian Grain Union estimates that grain exports from the country in the current season, compared with last year, has decreased by 11%, to 42,73 million tonnes, of which 35,78 million tonnes (-4,6% year-on-year) — wheat.

Food was getting more expensive even before February due to market conditions, high prices for energy and fertilisers. The special operation of Russia in Ukraine has exacerbated the pressure on prices. The FAO food price index reached a historic high in March 2022, then moved to a decline. As for wheat prices, wheat futures prices on CBOT reached record values in early March, exceeding the levels of 2008. Now wheat futures in the United States are trading below these values and are showing a decline since mid-May. However, prices are above the levels recorded over the past few years, and since the beginning of the year they have increased by 11%.

The main drivers of wheat prices in recent months have been supply-side factors. The offer is limited to protectionist measures of exporters. For example, in mid-March, the Russian government imposed a ban on grain exports (including wheat) to the EAEU countries until June 30. India also made a decision on the export ban in May. Exports from Argentina, also a major wheat exporter (7% of world exports), are limited by quotas, and crop forecasts have been lowered to four-year lows due to adverse weather conditions.

Twenty-two million tonnes of food are blocked in the ports of Ukraine

Another factor: the inability to make a purchase or delivery. Ukrainian exporters found themselves cut off from the opportunity to export their grain due to the blocking of the ports. At the end of May, Vladimir Zelensky estimated the volume of food blocked in ports at 22 million tonnes. Sanctions against Russia have made it impossible for African countries to purchase grain, according to Senegalese President Macky Sall.

Against the background of rising food prices, some agricultural traders and producers have performed well.

Archer Daniels Midland (ADM), an American agro-industrial corporation, is engaged in trade, transportation, storage and processing of raw food products, produces cereal processing products, oilseed products, food and feed additives. In the last reporting quarter finishing on March 31, despite a reduction in supply in the commodity markets, the company turned out to be the beneficiary of strong demand for food products, and since the demand for such goods is inelastic, the company shifted the growing costs to customers. Revenue increased by 25,2% YoY, and adjusted net profit — by 38,2% YoY, with a cost increase of 25,4% YoY. Since the beginning of the year, the company's shares have grown by 16%.

Adecoagro, registered in Luxembourg, is engaged in the production of plant and animal products (soy, corn, wheat, rice, dairy products, cattle) in South America (Argentina, Brazil, Uruguay). The growth rate of cost (+36% YoY) exceeded the sales growth of the first quarter (18,1% YoY). Net profit more than tripled, but adjusted net profit was under strong pressure due to currency fluctuations, especially the strengthening of the Brazilian real against the dollar, and decreased by 73% YoY. Since the beginning of the year, the manufacturer's shares have increased by 11,8%.

World wheat prices react to the actions of exporting countries

Bunge shares, although they followed the dynamics of other agricultural sector companies, are currently trading by 1,5% cheaper than at the beginning of the year. The agro-industrial corporation is engaged in trade, transportation, storage and processing of raw food products, processes grains and oilseeds. In the first quarter, revenue grew by 22% YoY, and net profit decreased by 16,4% YoY due to a reduction in gross marginality, an increase in commercial and other expenses. In the first quarter, the company incurred expenses from the loss of inventory, damage to factories and equipment due to the special operation.

To summarise: the consequences of the special operation in Ukraine have been superimposed on the market situation that developed earlier due to rising prices for energy and fertilisers, logistical problems. The increase in food prices noted in 2021 continued in 2022. World wheat prices react to news about the actions of exporting countries, expectations of future yields. The peak of the share price of foreign representatives of the agricultural sector fell at the end of April, but since then the securities have adjusted downwards.

Anna Buylakova

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.