Russia continues to steal the grain market limelight

In a week when the USDA released the latest chapter in its intriguing but never-ending world agricultural supply and demand saga, it was Russia which took centre stage, confirming plans for the introduction of grain export quotas in the New Year along with possible changes to the existing export duty.

The escalation of export restrictions comes as food inflation in Russia runs at a five-year high. Global wheat price continues to rise in order to ration supply. The new measures are being introduced in a bid to cool inflationary pressures by boosting upcountry stocks and increasing supply to domestic consumers.

The Ministry of Agriculture announcement last Wednesday initially led to a degree of market confusion around the actual start date of the proposed quotas, making mention of January. However, it is now believed that the finer details of the export restrictions on a range of commodities, including wheat, will be determined in December, and announced in January. The new export quotas are expected to commence on February 15, as previously mooted, and run to the end of the 2021/22 marketing year on 30 June 2022.

The size of the wheat quota will be determined by two things: final 2021/22 production and the pace of exports in the first six months of the marketing year. In late October, the Russian government reduced its wheat production estimate to 75Mt, 10Mt lower than last season. This is broadly in line with market estimates, with private forecaster Sovecon at 75.5Mt, Institute for Agricultural Market Studies (IKAR) in the 75-75.6Mt range and the USDA at 74.5Mt, up 2Mt from its October forecast.

In the communique last week ministry also stated the existing floating export duty formula may be modified to impose higher taxes should global wheat prices get close to US$400/t. Russian 12.5pc protein wheat was quoted up to $340/t fob for December shipment at the close of last week, up around $100/t since the beginning of the current marketing year.

Moscow introduced the floating export tax in June 2021, the magnitude of the tax determined by the ministry weekly. It is based on a formula that applies a 70pc tax to the difference between the government determined base price and the current market price. The tax is currently set at $69.90/t for the 10 November to 16 November period. This will rise a further $7.20/t to $77.10/t for the week ending November 23.

If the global wheat market continues to rally, which is highly probable given the current supply and demand imbalance, and Moscow decides to tweak the formula, it has two options. It can either reduce the base price: currently $200 per metric tonne for wheat, or it can raise the 70pc tax rate. Or the government could do both, I guess; such is the unpredictability of the authorities in Moscow.

The conundrum for Russia is a tightening global wheat balance sheet, clashing with a poor domestic production year. Russia has been the world’s biggest exporter of wheat in recent years. Importers want Russian grain, but the Russian farmer is refusing to sell. They know that as world wheat values rally, the exporters can pay more for their grain. Theoretically, the grower bid should be 30 cents higher for every dollar increase in the export price. But if the exporter is squeezed, it will likely be more. The Russian government gets the other 70 cents of course.

Russian wheat exports reportedly totalled 15.3Mt in the first four months of the 2021/22 marketing year, although it is difficult to get accurate and timely data. That is almost 19pc lower than the 18.8Mt shipped in the same period last season. With the export tax increasing substantially every week, wheat shipments from Russia’s Black Sea ports are already slowing.

And as the winter freeze sets in across Europe, it will be impossible to maintain the current pace of wheat exports. An export figure of even 3Mt per month would be quite an optimistic pace and would put exports at 25.8Mt by the time the quota would be introduced on February 15. When the flat export tax of $60/t was introduced early this year, Russia only exported 2.5Mt of wheat in the March to May period. This season the floating tax could be $100/t, or even more, by New Year.

The latest market talk out of Russia is a wheat export quota possibly as low as 5Mt for the February 15 to June 30 period, much smaller than earlier suggestions of 1.5Mt per month. The former would put 2021/22 exports at 30.8Mt, slightly lower than the Russian government’s export target of 31.5Mt, and the latter would put exports slightly higher at 32.6Mt by the season’s end.

However, both scenarios are still much lower than the USDA. Despite all the talk of increased export restrictions, the USDA raised its Russian wheat export forecast by 1Mt to 36Mt in last week’s monthly supply and demand update. Sovecon recently cut its Russian wheat export forecast by another 0.3Mt to 34Mt and IKAR kept its estimate unchanged, quoting a range of 31.5-32Mt.

The Russian farmer will largely determine the pace of the nation’s exports over the next three months. With new demand from global consumers surfacing every week, the world wants more from them at the moment than they are prepared to concede. And the same can be said of most of the major northern hemisphere exporters.

The market needs a widescale capitulation by the Russian farmer. Maybe a floating tax approaching $100/t and the prospect of an export quota may be enough to loosen their grip and entice them to sell nearby wheat ahead of the mid-February deadline.

GRAIN Central

Tags: wheat, wheat exports, world’s biggest exporter, supply and demand imbalance, wheat quota, Russia, USDA