Global Grains
David Lehman, left, managing director, CME Group, leads a panel discussion on the Black Sea with Oleg Kryukovskiy, middle, GTCS Trading DMCC, and Alex Saenko, right, Pasternak Baum & Co, Inc.
Photos by Susan Reidy.
The Black Sea region, particularly Russia and Ukraine, are poised to significantly grow their agriculture production, according to speakers at the Global Grain North America Conference in Miami, Florida, U.S., this July.

The region already is a critical wheat producer and is also the only part of the world producing barley in large quantities. Today, the Black Sea region has grain exports of 80 million tonnes as compared to an average of 30 million tonnes of imports in previous decades.

“That’s a shift of 110 million tonnes; that’s bigger than China,” said Alex Saenko with Pasternak Baum & Co, Inc., a global agricultural cash commodity broker. “If this shift had not happened, we would be paying a lot more for our hamburgers.”

According to some estimates, Ukraine has the capacity to double its agriculture production, while Russia may see its output increase by 40% in the next 10 years.

Ukraine outlook

Agriculture is a large part of Ukraine’s GDP, growing by 7% per year from 2007-13 with the potential to grow at a similar clip going forward. The nation has 22 million hectares of agriculture land and another 4 million hectares of abandoned land that eventually may be brought back into operation, he said. Ukraine also has 15 deepwater terminals to handle exports.

By local estimates, the country has enough capacity to double its agriculture production within five to seven years. Its major crops include barley, wheat, corn, soybeans, peas and pulses. Barley doesn’t produce enough value for farmers so exports and yields are flat, Saenko said. In some cases Saudi Arabia, a main destination for barley exports, is pre-financing farmers to ensure supply.

The U.S. Department of Agriculture estimates Ukraine will produce 25 million tonnes of wheat next year and export 12.5 million tonnes. Ukrainian estimates have production at 24.2. million tonnes and exports at 14 million tonnes. Production and exports continue to grow, and yields are increasing at a reasonable clip, Saenko said.

The biggest commodity in Ukraine is corn, with estimated production this year at 23 million tonnes and exports of 16 million tonnes. Ukrainian estimates have corn production at 25 million tonnes next year.

“Yields keep going up and we are still under 6 tonnes per hectare, which is by local standards alright but about half of what the U.S. does,” Saenko said. “The planted areas for corn keep going up, production keeps going up and exports keep going up. Domestic usage remains fairly flat.”

He said there are occasional complaints about the quality of Ukrainian corn. A lack of infrastructure means the corn isn’t always handled in the gentlest way, leading to a higher percentage of broken kernels, averaging 3.44%. But, Saenko noted, the average damage percentage is low at 1.6%, and the corn meets the acceptable limits for vomitoxins and mycotoxins.

About 10 years ago, Ukraine produced about 200,000 tonnes of soybeans. This year, production reached 3.8 million tonnes with exports of 2.2 million tonnes. That total is expected to grow in 2016-17 to 4.3 million tonnes and exports of 2.4 million tonnes.

Total grain exports for 2015-16 are estimated at 39.4 million tonnes, which is a record, Saenko said.

Global Grains
Oleg Kryukovskiy, a trader with GTCS Trading DMCC, Dubai, United Arab Emirates, said Russia's overall grain production (wheat, barley and corn) has grown 70% in the last ten years to 94.5 million tonnes.


Russian records

Russia is setting its own records, and right now it is the world’s top wheat exporter, said Oleg Kryukovskiy, a trader with GTCS Trading DMCC, Dubai, United Arab Emirates. The nation has huge potential for production and export growth, he said.

“For the next 10 years we have the potential to grow 40% more than we do right now,” Kryukovskiy said. “Our price/quality ratio makes Russia the best choice for consumers.”

Russia produces high quality wheat, he said, with very little being used for feed. Test weights average between 77-81 kg/hL, and this season are in the 80-83 kg/hL range. Dry protein content ranges from 12% to 15.5%, with more coming in on the higher side.

The nation’s overall grain production (wheat, barley and corn) has grown 70% in the last 10 years to 94.5 million tonnes. Exports have had their ups and downs because of export bans, but overall in the last 10 years exports have doubled to around 33 million tonnes, Kryukovskiy said. Corn exports grew from nearly zero in 2005 to 3 million tonnes in 2015. Key export destinations include countries in the Middle East and Africa.

For 2016-17, total crop production is estimated at 110 million tonnes, with wheat accounting for about 66 million tonnes.

Farmers in both nations have enough storage to hold their crops until prices reach a desired level. Ukraine has 785 officially registered elevators with 20 million tonnes of storage capacity, but it has a 60-million-tonne crop. Farmers, however, can hold everything they produce, Saenko said.

“He can sell as little as he has to if he doesn’t like the price,” he said. “They will be holding their grain.”

It’s the same in Russia, where about 70% of farmers have their own storage whether it’s in elevators, warehouses or plastic sleeves. Last year, farmers were spoiled by a huge currency devaluation that meant grain prices locally were going up on a daily basis, Kryukovskiy said.

Interior infrastructure in both nations might pose a challenge to exports in the future. Russia’s grain storage is increasing and it has seen new ports, but the delivery system to the port remains the same as it did 10 years ago, Kryukovskiy said. Still, he said the lack of improvements won’t limit exports because there is enough capacity.

In Ukraine, port terminal developments are massive, and by some estimates may increase by another 20 million tonnes in the next few years, Saenko said. But the infrastructure needed to deliver grains to the ports is limited. For the first time this year, truck weights are limited, increasing costs, he said. One bright spot are the two Ukrainian rivers that may be used to move grain by barge to the ports. Nibulon, a port operator based in Ukraine, has told the government it will dredge the rivers and is fighting for permits to do the work.

“If they get the permits, the floodgates will open,” Saenko said. “They can bring the grain from up north. It will drop the cost of transportation enormously.”

||| Soybeans experience parabolic move, next page |||

Global Grains
A perfect storm of market factors led to the parabolic move of soybeans this spring, said James Koutoulas, Typhon Capital Management.


Soybeans experience parabolic move this spring

Just about every factor that can drive a market has done just that to the global soybean market since the end of 2015. Looking ahead, about the only factor that may bring soybeans back to normal is a perfect U.S. crop.

“Right now, the weather forecasts are not expecting that,” said James Koutoulas, chief executive officer, Typhon Capital Management, Chicago, Illinois, U.S., at the Global Grain North America Conference. “If it continues to be super-hot in August, soybeans can absolutely take off.”

Fair value for November soybeans is expected between $13 and $15 per bushel, especially if the heat dome over the U.S. plains doesn’t dissipate, he said. August weather plays a bigger role than July weather for soybeans. A problematic Brazilian harvest and changing Argentine tax structure also factor into the mix.

“I’ve never seen so much attention paid to the Argentinean tax structure,” Koutoulas said. “The tariff on beans is a big issue there. Farmers will continue to plant less than expected and that could put further pressure on beans.”

Most factors pointed to a bearish soybean market until this spring, he said. At the end of 2015, U.S. stocks were forecast at 450 million bushels, which would have been the largest increase in stocks since 2006-07. Brazil was experiencing nearly perfect weather, and there was speculation that Argentina’s new government would cut export taxes on soybeans. Global ending stocks were forecast at a record 85 million tonnes.

“This led to a situation where we had historical low volatility in both the grains to start the year,” Koutoulas said. “Furthermore, we moved into 2016 and all the analysis coming out was similarly bearish.”

Weakness on the demand side, as domestic crush margins became less of a driver, was another bearish factor. Chinese demand was relatively constant, but the U.S. looked better prepared to handle with a massive stock buildup.

“None of this was terribly bullish,” Koutoulas said. “Here’s what actually happened, which we know was a really vicious move in soybeans.”

In January/February, everything was still fine, he said, even though Argentina didn’t cut tariffs like expected in soybeans. This resulted in some lower acreage, which was the first bullish sign. But the weather was holding, and volatility was still very low.

“Even though we started to see little hints of what was to come, the market was pretty complacent,” Koutoulas said. “It wasn’t really expecting the rip that happened on the bullish side.”

March is when the market started to turn, he said. Argentina had 10 to 20 inches of rain in a two-week period, causing massive losses of between 3 million and 10 million tonnes. At the same time, hot, dry weather in Brazil also caused losses.

The forecast for stocks kept dropping and went below 78 million tonnes, he said. In March, the U.S. Department of Agriculture lowered its planting estimates to 82.2 million acres from 83.1 million acres.

“This is when the funds started going long on soybeans,” Koutoulas said, taking net short 30,000 contracts to long 100,000 contracts by April 12. “These issues continued and actually got worse.”

Soybeans continued to rally in April when the South American harvest went poorly, with yields not coming close to meeting Chinese demand. At the same time, there was an unusual increase in export commitments, and anticipation that a La Niña in summer would cause hot, dry weather.

The rally kept going in May with the big driver being the strong implied crush margins, Koutoulas said. Brazil and Argentina lowered production estimates while demand for old crop U.S. soybeans spiked. Funds had massive open interest with 200,000 long contracts.

“The last time it was that high was 1973,” he said, adding that on a dollar-basis it was the second highest long-bean exposure ever.

The implied board crush margins (the profit from buying soybeans, crushing them and selling the meal and oil) increased from 80¢ per bushel to a record $1.70 per bushel.

As the northern hemisphere headed into summer, there was a sharp pull back – about 30% in June, Koutoulas said. U.S. soybean planting progress was smooth, and there’s speculation that acres will come in significantly above the March forecast. In the June 30 acreage report, USDA had soybean plantings at 83.7 million acres, above analyst expectations and forecasts. Weather worries remain constant, he said.