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Black Sea grain export disruptions won’t be easy to replace, analyst says

Where does one begin to describe this week’s events?

After months of watching Russia build up a military presence from three directions around Ukraine and endless speculation of President Putin’s intentions, there is no more guessing.

Thursday’s invasion into Ukraine by Russia confirmed suspicions that the build-up wasn’t just military drills and is the push by Putin to finally seize Ukraine and bring it back into the Russian universe, even if he is the only one that wants it.

The markets, of course, have been on high alert to this prospect over the last couple of weeks, adding significant price risk into wheat, corn, and soybeans, but still cautious as the world hoped common sense would prevail. So, when the invasion did happen, the markets surged higher in anticipation of major disruptions of grain exports from the Black Sea, which supplies 1/3 of the world’s wheat and corn.

All three wheat futures markets were sharply higher Wednesday night, but it was Chicago and Kansas City that held together best during the day session, closing the Thursday session limit up on the front months. Corn and soybeans also saw huge gains initially (corn limit up) but couldn’t hold those gains into the close. Beans closed lower with a large spike high, and corn closed mid-range also with a spike high. 

The first hints of the markets running out of gas were actually on Thursday, even when the futures were limit up. First, trading volume was massive after seeing huge volume the previous two sessions. Second, while futures were limit up, deep in-the-money call options were not up a like amount. Options don’t have limits, and prices suggested futures were already close to their synthetic values.

We came into Friday’s session with expanded limits in Chicago and Kansas City wheat of 75 cents/bushel. This time, however, price action quickly turned south. Even as Russian troops headed into the Ukraine capital and took over key port cities, the markets just couldn’t hold the gains with the huge risk heading into the weekend. Just as quickly as the markets had rallied, they gave it all back with massive selling, taking wheat in Kansas City and Chicago down their 75-cent limits, with Minneapolis down its 60-cent limit. Front month March contracts traded without limits. 

Reports that Russian officials were willing to meet with Ukrainian leaders added to the deflation. Today’s price drops were the largest for one day in over 5 years as traders were unwilling to hold positions in the face of huge uncertainty.

Assessing the fallout from the invasion will be a day-to-day exercise in pulling your hair out. Judging from price action, no one has a clear view. I think it is safe to say that most exports will halt because even if the ports remained operational, insurance companies will be unlikely to offer policies on cargoes.
Commercial activity at some of Ukraine’s ports was shutting down, and other Ukrainian exporters were warning of delayed deliveries. Bunge suspended all operations in Ukraine, prioritizing safety for its workers. NATO sanctions against Russia that targeted international payments would make it virtually impossible for them to do business.

Lebanon reported that two cargoes of wheat that had been loading in Ukraine were being delayed and they were looking elsewhere to fill those orders. I would expect more stories like this are coming. China has purchased several cargoes of Ukrainian corn; even though they are not condemning Russia for the invasion, it does put them in a peculiar position if grain deliveries are delayed. 

Grain export disruptions from the Black Sea won’t be easy to replace. Their wheat is a hard red winter, so buyers would need to come here or to Argentina, who had a record crop last fall, but they only have a small amount left that is exportable. Much of our hrw crop last year went directly to the feedlots off the combine, so our supplies are relatively tight – and our new crop is staring at drought conditions now with long range forecasts suggesting those conditions will stick around for another three months! Spring wheat is a limited option even because of tight supplies from last year’s drought in the U.S. northern Plains and Canadian prairies and its higher price. Europe and Australia could supply wheat but they both have soft varieties.

U.S. wheat prices have consistently been the highest in the world this marketing year. This week’s volatility/pressure could bring us more in line with world prices. Last week export sales were 686 TMT, well above expectations and the first strong report in weeks. I would expect we will see more business come our way, being a reliable supplier, more competitive and with an ability to usually load out fairly quickly. That said, if drought persists in the southern plains, prices will skyrocket.

Alternative corn suppliers gets even more interesting. There are four major corn exporters: the U.S., Argentina, Brazil, and Ukraine. Normally, buyers could switch to South America within a couple of months, but they experienced intense drought during the key stages of corn production. Production is way down from average and Argentina is unlikely to be a significant player in the corn export market this year. Brazil is just now planting their second season corn crop. They have plenty of moisture in central/northern regions, but the drought of Argentina also affected southern Brazil. Timely rains are forecast for the next couple of weeks, which would be huge to South American production – but it won’t be available until July. 

From a vegoil perspective, the Black Sea is a major supplier of sunflower seeds. Normally, Brazil would be exporting a great deal of soybeans about now, but too much rain in the north and not enough in the south have hurt yields and quality, so Brazil’s exports will be way down this year, pushing business to US soybeans and other oilseeds.

Egypt issued a tender this week – talk about bad timing. But they only had one offer (from France) at $399/MT FOB, a huge $61/MT higher than last week’s purchase, an increase of about $1.65/bu. Egypt cancelled the tender, which likely contributed to the market’s faltering.

Price volatility has been intense, and I expect it will stay that way for the near future. Aside from the Black Sea tensions, we still have the winter wheat growing season ahead of us - with drought plaguing almost every acre of hard red winter wheat plantings. Spring planting promises to have some fireworks as well, and there is the issue of farmers baling at sky-high fertilizer prices and the likely drop in yields as a result.

My guess is that we are in the final stages of this long bull market, but that there is plenty of fireworks still to be seen. The Black Sea tensions added gas to a fire, accelerating price action and establishing what looks like an important high. That said, I expect we will re-test this week’s highs for all the grains by early May, when the normal season pattern has grains peaking.


Louise Gartner,
Spectrum Commodities

Listen to my podcast on wheat and cattle: 

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