Russia-Turkey wheat trade up in the air as war of words continues

Diplomatic fallout between Moscow and Ankara has dragged on all week, following the shooting down of a Russian jet by the Turkish air force. Business between the two has been put on hold temporarily as emotions and uncertainty have come to replace the long-standing trading relationship between the two countries.

Talk at the moment surrounds a time-tested Russian policy of hurting its enemies economically with agricultural imports. Russia’s food inspection watchdog is currently targeting Turkish pomegranates and cucumbers imported into Russia. These apparently random phytosanitary issues have a tendency appear at the most convenient of times, having been used in the past to stop Georgian mineral water, Moldovan wine, Ukrainian chocolate and – most recently – European cheese from entering Russia during periods of geopolitical tension.

A ban on imports of Turkish fruits and vegetables is ready to become official policy. A list is currently being drawn up and approved by the government, Deputy Prime Minister Arkady Dvorkovich said on Monday. Whether this goes the other way and Russian exports to Turkey will be limited in the coming weeks remains to be seen. It would be big news if it did. Russia sold over 4 million mt of wheat to Turkey in the previous marketing year, making it the single largest destination for Russian wheat.

The early signs last week were not positive. Russian customs reportedly stopped three vessels from setting sail from Yeisk to Turkey last week despite the lack of official government guidance. As other Azov Sea ports were reportedly operating as normal despite the tensions, it should be assumed that someone in Yeisk opted to take matters into their own hands. Given Russian port authorities history of selective (and sometimes over-zealous) enforcement, this should not come entirely as a surprise.

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Turkish authorities, meanwhile, were accused of halting Russian-flagged vessels in the Bosporus. Ostensibly this was for routine checks on vessels over a certain age, but did not stop rumors that Turkey would shut the Dardanelles to Russian traffic on the grounds of the 1936 Montreux Convention. While some in the market were busy dusting off their history books, heavy traffic in the Sea of Marmara and foggy conditions were probably more likely to blame and only added to this week’s confusion.

Looking at the longer-term impact of this issue, Russian farmers, traders and shippers will struggle as they are forced to look for alternative market for their supplies. Suppliers have already been sounding out the Southern and Eastern Mediterranean as well as North Africa for potential buyers, but the market for coaster sellers is not as big or well-developed there. Furthermore, the annual shutdown of the Kavkaz transhipment due to poor weather will only compound the impact on small vessels.

The milling industry in Turkey would also suffer. Turkish millers need alternative supplies to Russian wheat, and are particularly in need of a high-protein content to blend with local reserves. Typically buying Russia’s high-quality, low-cost wheat on a hand-to-mouth basis, any supplies that they have will now be depleting currently and a restock will have to happen eventually.

Who could help? The Ukrainian government and its grain industry have graciously volunteered to step in and sell its produce and act as a guarantor of Turkish food security. However, there are notable quality issues that cannot be overcome. Bulgarian and Romanian wheat has been touted as a possibility, although again the same problem exists, along with concerns about remaining volumes after a hot, dry year.

One of the more interesting options that Turkish suppliers have apparently been sounding out this week is the Baltic Sea. This is a potential solution, but it would require a significant rethink of the way in which the buy side conducts its business.

First, Baltic wheat – while of sufficiently high quality – is much more expensive than its Russian equivalent. Latvian or Lithuanian 12.5% protein wheat for January shipment is currently in the region of $196/mt FOB Klaipeda. Similar quality Russian wheat can be picked up for the same delivery period at $194/mt on a CIF Marmara basis, when the two sides choose to trade with each other. In order to make up for this difference, additional capital will have to be found somewhere in the first place. Higher flour costs, meanwhile, could in time push Turkey’s East African downstream flour market into the hands of alternative Middle Eastern producers in the Gulf States.

Second, the Russian deliveries take place on coaster vessels, while Baltic wheat is typically sold on the much larger handysize. The difference between buying 3,000 mt at a time and 30,000 mt is significant and would require the additional infrastructure to handle and store these deliveries. This creates an additional intermediary step in the market that would raise costs for buyers and most likely outweigh any positive impact of millers spreading their risk between each other as they pool their procurement policies.

All in all, it is probably better for the grains industry if both sides settle their differences as both sides need each other. Indeed, by Tuesday morning it was already apparent that the diplomatic standoff had got too much for some in the industry, as four coaster vessels were heard trading for December and January shipment.

This could be the beginning of the end, as the industry decides it does not want to play out politicians’ battles and instead choose to focus on the things that they are good at. What happens next, however, is probably more likely to be decided in Moscow and Ankara than in Krasnodar and Istanbul.