EU to shift tactics on gas, grain volatility in 2023-24

The EU explored alternative agricultural and gas flows to soften the blow of high food and energy prices in 2022, but it may need to change its supply strategy going forward as Russia holds increasing sway over grains trade and China fully reintegrates the global food and energy markets.

Both global cereal and vegetable oil price indices hit a record annual high in 2022 but food prices fell for the tenth consecutive month in January, latest data from the UN’s Food and Agriculture Organization show.

Europe in 2022-23 swerved most of the supply disruption caused by drought-induced corn output losses in France and Romania by increasing imports from Ukraine (see chart) — Ukraine’s seaports reopened in August, in time for Europe’s October-September corn marketing year. Both Europe’s net importers and net exporters leaned on Ukraine, with total EU corn imports up by more than half on the year for the period of October-January (see Argus‘ EU corn imports D&D), driven mostly by larger volumes arriving into Spain and Italy. Multiple cargoes of corn also shipped from Poland to southern France, reportedly containing old stocks of Ukrainian corn in Polish warehouses.

But while Ukrainian supply smoothed over the impact of unfavourable weather in the short term, a drop in the country’s export pace since December has given way to renewed price volatility in EU markets for the second half of the corn marketing year. Reports of heat stress-induced mycotoxins in cargoes of eastern European corn heading to Benelux countries and Spain rapidly drove up corn prices at French Atlantic ports in the first week of February. The EU’s corn import pace last week dropped to its lowest level so far this marketing year (see chart).

Buyers are also competing with China, which continues to sweep up large volumes of Ukrainian corn at premium prices, despite China’s own record domestic crop this season. Chinese demand similarly is set to siphon off much of Brazil’s new-crop shipments to the EU through a newly opened trade route that has seen more than 2mn t of corn head from Brazil to China since December.

As for Ukrainian new-crop corn, Ukrainian farmers are set to reallocate swathes of corn areas to sunflower, rapeseed and soybeans in the current planting period, as reduced access to funding and fertilizers is making growers strive to optimise the nitrogen-fixing qualities of oilseed crops.

As for winter crops, a mild winter has meant the EU’s newly planted wheat and barley avoided frost damage this season, but resulting low frost tolerance makes the crops vulnerable to future cold snaps.

And the EU is set to begin 2023-24 with a weakened net export position for wheat. Russia is poised to carry more than 21.9mn t of wheat into the new marketing year, according to Argus‘ analytics arm, Agritel, a record level and a figure up by more than half on ending stocks in the previous year (see chart).

Agritel projects ending stocks for the EU 27 at 14.1mn t, leaving the bloc in a comparatively suboptimal position to fill global demand in 2023-24. This contrasts with the current marketing year, when a five-month impasse at Ukraine’s seaports from March-July pushed buyers further west. France’s total wheat exports in July-August, the first two months of the 2022-23 marketing year, rose by 60pc above the previous five-year average, customs data show. Unpredictable weather events amplified the surge. Poor harvests in northern Africa made buyers more dependent on imports, with Morocco importing about 700,000t of French wheat in July alone (imports from the EU 27 as a whole made up 96pc of receipts that month), as the Moroccan government relaxed restrictions on imports that are typically in place during the local harvest period.

Meanwhile in the US, several cargoes of northern European wheat traded to millers in Florida in December, introducing a highly unusual trade flow as a poor start to the next US crop drove up local prices.

And a similar trend for the 2023-24 marketing year has already emerged for French new-crop barley. Chinese buyers in the past weeks have secured more than 20 cargoes of optional-origin feed barley for July-August shipment. Sellers are set to supply the bulk not from Ukraine — early projections peg Ukrainian barley acreages at historic lows for the coming season — but rather from France, causing delivered-to-port prices to spike.

On a farmer level, crop switching is helping farmers balance revenue with input costs, but it could alter the availability of certain less profitable crops. Local sources suggest that farmers in central and northern Italy have switched 10-15pc of corn areas to durum wheat this year, while in southeastern Turkey, farmers have reportedly doubled the proportion of wheat areas allocated to durum at the expense of soft wheat.

European farmers’ access to fertilizers remains closely tied to global prices for finished products and gas feedstocks.

Prompt prices at Europe’s most liquid gas hub, the Dutch Title Transfer Facility (TTF), have progressively dropped over the past two months.

Argus‘ TTF everyday prices so far this year have hovered at €53-73/MWh, well below the average of €121/MWh last year but markedly above historic levels.

Europe is emerging from a mild winter, with German storage operators expecting to fill the country’s gas storage ahead of the 2023-24 winter, so long as the current “moderate to high” LNG imports continue.

But European gas stocks also benefited from unusually low Chinese demand. Chinese LNG demand could remain low even as the country’s Covid-19-related restrictions ease, but any future uptick would mean less supply for Europe. The balance is likely to rest on timing. Unlike in Europe, where Germany targeting gas stocks of 40pc of capacity on as early as 1 February, China’s limited domestic storage limits the country to buying on the spot market, peaking just ahead of winter.

In the meantime, Europe’s ammonia producers have been slow to react to a decline in European natural gas prices over the past two months — Europe’s ammonia output is currently at 70pc of capacity — with imported ammonia continuing to feed into much of the bloc’s downstream nitrogen and complex fertilizer production. Major fertilizer producer Yara continues to rely on ammonia from the Middle East, northern Africa and North America to fill its structurally short position within the bloc.

As a result, Europe’s finished fertilizer prices are to remain volatile into 2023-24. An unseasonal surge in European natural gas prices in late August, which partially shut down nitrogen production across the continent, prompted some buyers to step into the international market at top prices. France in September became one of the highest-paying markets globally when it sourced nitrogen fertilizers from the US.

EU 27 last four-week average corn imports ‘000t

EU imports from top two suppliers in Oct-Jan mn t

Wheat ending stocks for world’s top exporters

Tags: fertilizers, gas, Ukraine, food, Russia, markets, China, energy, corn, cereal, EU, whea, prices, weather, Vegetable Oil, output