Analysis: Black Sea, EU wheat prices expected to stay firm on warmer winter, robust demand

New Delhi — Concerns of lower wheat production due to prolonged dry weather and strong demand for EU and Black Sea wheat is keeping local prices firm in the region, with the trend likely to continue as weather remains unfavorable during the region's winter wheat planting season.

Wheat prices have been rising steadily since August in the EU and Black Sea as global buyers rush to the market, while key regions face drought like conditions.

Russian wheat with 12.5% protein FOB Black Sea was assessed at $232.00/mt on Sept. 30, up from $210.75/mt in August-end, according to S&P Global Platts data.

Ukraine 11.5% wheat FOB Black Sea was seen at $231/mt on Sept 30 from $206/mt in August end, Platts data showed.

Dry weather has disrupted and delayed planting in many parts of the major wheat producing and exporting countries­­ –Ukraine, Russia and the EU.

"Winter wheat planting has started, and it has been dramatically dry in the Black sea," said Victoria Sinitsyna, grains analyst with S&P Global Platts Analytics. "If farmers are unable to plant in time, or crops don't develop before winters, that will be supportive to prices on the local markets."

Winter wheat is planted in most parts of the EU and Russia through September-mid October, while in Ukraine winter wheat planting is mostly completed in September.

According to the US Department of Agriculture, EU and Ukrainian wheat production is estimated to be 12% and 7.4% lower, respectively, year on year.

Wheat production in Russia is expected to be almost 6% higher on year at 78 million mt, according to the USDA. However, the higher production in Russia might not be enough to offset the reductions in Ukraine and the EU, analysts said.

LONG-TERM WEATHER FORECAST DRY

Long-term weather forecast for the Black Sea suggests warmer than usual winters, and lower than normal rainfall which can particularly impact germination of the winter wheat crop, said Malysh.

Across Europe, temperatures are likely to be warmer than normal for the next two to three months, according to weather agency Maxar. Development of a La-Nina is also causing concerns of dry weather over the Black Sea and the EU, Maxar said.

According to some market sources, in many places, some of the planted wheat seeds did not germinate, and some failed after germination because of the dry weather.

Sinitsyna from Platts Analytics added that higher wheat prices are likely to encourage farmers to plant larger area, but the dry weather may hamper their efforts.

"Now, prices have started rising, and this is the time when farmers usually take planting decisions regarding what they should plant and what will be more profitable, winter wheat now or plant spring crops in spring. The price shows that it might be more profitable for farmers to plant wheat, however, due to the issues of dryness farmers might not be able to plant as much as they'd want," she said.

In Ukraine, if the weather conditions stay unfavorable, farmers may just wait till spring to plant corn. In Russia, farmers can turn to spring wheat planting since demand for Russian corn remains usually remains on lower side.

DOMESTIC FACTORS

Additional to the weather woes, higher origin cost is also adding to the cost of Black Sea wheat, according to Malysh.

The Southern parts of Russia and Ukraine are facing extremely dry weather, and that is the major producing region for wheat in these countries. Concerns of lower production in these regions now have shifted the focus to Central regions which have received decent rainfall.

"The central regions are far away from the exports hub and it will take a lot of time and additional cost to deliver wheat from the center to the export hubs," she said.

Additional to that, slow farmer sales are also likely to keep prices firm, said Malysh.

Black sea farmers are holding back on wheat stocks hoping for prices to rise further, she added.

STRONG EXPORT DEMAND

Foreign demand for Russian and Ukrainian wheat remained strong during August-September, supporting prices, according to analysts.

Concerns of supply disruptions due to the coronavirus pandemic are also keeping demand from importing countries firm as they are building reserves ahead of an anticipated second wave of the pandemic, analysts said.

"Russian wheat is also trying to enter new significant markets like Saudi Arabia, Algeria and this is creating additional demand," Svetlana Malysh, Black Sea agriculture markets analyst with Refinitiv said while addressing a webinar.

Jordan, Pakistan, and Vietnam also emerged as major buyers for Black Sea wheat during the 2020-21 marketing year, she added.

Meanwhile, strong demand from China for overall grains is keeping sentiment buoyant for global grains complex, according to Malysh.

China is buying record amounts of corn and soybeans, and some amount of wheat, reportedly to build state reserves.

Egypt—the largest wheat importer—has also been making significant purchases from Russia as wheat production in Egypt's primary supplier EU is seen falling.