Ukrainian agricultural forward contracts see higher defaults as harvest yields shrink

New York — Drought conditions through Ukraine's spring and summer reduced yields across a range of agricultural crops leading to reduced production, rallying prices and contract defaults.

CORN

Forward contract defaults have been most prevalent in the Ukrainian corn market with 40%-50% of corn forward contracts expected to be unfulfilled, according to market estimates. The two driving factors behind the defaults are price and inability to supply. Tighter production and a shortage of corn leaves some suppliers, mostly small-sized producers, with no corn to fulfill forward contracts.

In the US Department of Agriculture's November World Agricultural Supply and Demand Estimates, Ukrainian corn projections for the 2020-21 season were reduced by 8 million mt from October estimates to 28.5 million mt. This is a 21% decrease from production in the 2019-20 season, reflecting the impact of the severe weather conditions on corn yields.

As farmers default on forward contracts, exporters are forced to purchase corn on the spot market. This has led to increased CPT prices, pushing up FOB prices. "When you are defaulted for half of the volume you need, you go to the market to chase it as you have commitments so this boosts the market," said a Ukraine-based source. Ukrainian corn prices have rallied by 14% on the month to $239/mt on Nov. 12, a 44% increase on the year.

The rallying corn prices, a symptom of tight production and forward defaults, leads to the second driving factor behind defaults; price. As prices surge, sellers become more likely to default on forward contracts in order to secure a better price on the spot market.

SUNFLOWER

Similarly, in the Ukrainian sunflower seed crop, adverse weather conditions have tightened production expectations. Market estimates range between 12.5 million mt to 14.5 million mt for the 2020-21 season due to reduced yields, falling short of last season's record crop of 16.5 million mt. Seed prices have skyrocketed and farmers have had to default on forward commitments or renegotiate with buyers.

This has had a knock-on effect on the sunflower oil market, with oil spot prices rallying by 8% on the month and 50% on the year to $1,070/mt on Nov. 12. Seed shortages have squeezed crushing margins to fine or negative margins. Seed crushers with forward commitments for oil have had to default contracts due to non-delivery of seeds or negative crushing margins.

"When the [sunoil] market goes up or down by $200/mt, people default on both sides – we see this on the market all the time," said a trader.

Defaults in the sunflower oil market have not been as prevalent as in the seed market but market participants have reported defaults for a 25,000 mt sale of oil for October shipment and a 6,000 mt sale for November loading.

"Defaults are more common on containers" where oil is sold in smaller volumes to smaller buyers as opposed to tankers where oil is sold in a higher volume, added a second source.