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Commodities 2021: Bullish expectations for 2021 Black Sea wheat prices

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Commodities 2021: Bullish expectations for 2021 Black Sea wheat prices


Near-record Russian wheat production for 2020-21 marketing year

Russian export duty due to be implemented mid-February

Low 2020 wheat production from Ukraine hits exports

Greater competition expected from other producers

  • Author
  • Callum Sinclair    Alexandre Bobylov
  • Editor
  • Richard Rubin
  • Commodity
  • Agriculture

New York — The Black Sea wheat market is entering 2021 at a six-year high and on a bullish trajectory, and as Russian quotas and tariffs are to be enforced by mid-February that market may experience further volatility in the near future.

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Black Sea wheat prices experienced extreme volatility during 2020, reaching a six-year high at $258.50/mt on Oct. 23 and again on Dec. 27, and continued to push further at historically high levels while production reached near-record levels in Russia. Demand for wheat from elsewhere is expected to remain strong during the second half of the 2020-21 season (July 1-June 30), providing support to high prices.

Strong demand exists from several countries as they look to stockpile to ensure food security and because of concerns over 2021 Russian winter wheat production due to weather risks. Even though weather conditions in the Russian winter wheat-producing regions have improved, the risk of negative impact on the yields and thus production level are still present, which will also provide support to the prices in Q1 and Q2 of 2021.

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Russia will start export quotas on grains and an export duty on wheat exports starting from Feb. 15, which will be a bullish factor to wheat prices in the Black Sea region. The export duty burden is expected to be split between Russian producers and importers; the main question is in what proportion to each party.

Additionally, Black Sea-origin wheat will face competition from other sources in the second half of the 2020-21 season, mainly Australia, the EU, Canada and Argentina. With Australian wheat already a major competitor against Black Sea supplies in Southeast Asia, Argentina will enter the wheat export market in the first quarter, further increasing competition.

For the major importing countries of Black Sea wheat, including Egypt and Turkey, the US Department of Agriculture expects imports at 123.65 million mt in the 2020-21 marketing year (July 1-June 30), up 1.2% from 122.16 million mt in 2019-20. Sudden demand increases for wheat followed the second wave of the coronavirus pandemic has led to a spike in international tenders, further increasing demand.

Russian exports

Given greater Russian production, the USDA projects the country's wheatexports at 40 million mt for the 2020-21 marketing year, compared with 34.39 million mt in 2019-20. Exports are anticipated to maintain their high levels in January 2021 before being curtailed in mid-February by the Russian grain tariffs.

Favorable weather conditions in Russia's central regions and Siberia have resulted in higher yields and a record national crop of 85.9 million mt, up 11.4 million mt year on year, according to the agriculture ministry, However, hot and dry weather in April and May resulted in lower yields and production in southern parts of Russia.

Ukraine is not expected to be a major player in grain exports in 2021 due to the lower poor production during 2020. Although production reached near-record levels in Russia, Ukrainian production suffered significantly from drought, falling 3.67 million mt year on year to a projected 25.50 million mt for the 2020-21 harvest, according to the USDA's December World Agricultural Supply and Demand Estimates report. The projected 2020-21 exports fell by 3.51 million mt to 17.50 million mt compared with the previous year, according to the USDA. Ukraine has exported about 70% of its exportable potential by December 2020.

Although growing conditions improved concerns over the 2021 production keep flying in the market. Increased demand from several states to ensure food security have been providing support to wheat prices in the Black Sea region. Also, dry weather during the winter planting season in Russia has created concerns over the 2021 wheat production level. As a result, prices soared to the initial six-year high at $257.25/mt on Oct. 23.

High international prices and sustained internal demand have pushed up the Russian domestic wheat prices and led to food inflation. To combat the price rise, the Russian government announced its introduction of an export quota and taxations of exports.

The Russian export quota of 17.5 million mt of wheat, barley and corn will be introduced starting from Feb. 15 until June 30. The export duty on wheat will enter into force at the same time as the quota. It will be Eur25/mt within the quota and 50% outside the quota. This will undermine the competitiveness of the Russian wheat on the international market. The burden of the export duty will be split between the exporters and Russian producers, according to market sources. Other origins from the Black Sea region, Ukrainian and Romanian in particular, will benefit from this situation.

Southeast Asia

Australia is expected to nearly double its production this season. It is predicted to reach 30 million mt compared with 15.2 million mt during 2019-20, according to the USDA. Wheat exports from Australia are also expected to double in the 2020-21 season to 20 million mt.

Abandoned production in Australia resulted in better competitiveness of Australian wheat in the international market, in Southeast Asia in particular, ALSO one of main export destinations for wheat from the Black Sea region. The Black Sea region and Australia, along with Argentina, generally compete for the Southeast Asian wheat market, especially Indonesia, the world's second-largest wheat importer.

Following a decline in Ukrainian wheat production and exports, it won't be able to fulfil the demand in Southeast Asia, analysts said. And while Australia lost its top position as a wheat supplier to Indonesia in recent years, its production prospects this year are setting it up to make a comeback.

As harvest seasons alter between the Northern and Southern Hemispheres, Argentina will begin to export wheat in the first quarter 2021. Argentinian wheat, therefore, will soon compete with Russian and Ukrainian production. However, because dry weather has negatively impacted crop growth during the significant growing months, production in Australia is expected to fall by 1.76 million year on year to 18 million mt for the 2020-21 season and exports are expected to down 1 million mt, to 12.5 million mt, according to the USDA.

Conversely, looking at the Canadian market, according to the December WASDE report, production and export projections for the 2020-21 marketing year have remain relatively unchanged at 35 million mt and 25 million mt, respectively.