With export duty, Russian wheat shipments off the radar
Russian milling wheat—the world’s most traded wheat of 11.5-12.5% protein—has suddenly disappeared from the trading kitty of international traders in the last 15-odd days. What is the export price of Russian “milling wheat” today? Trade reports are marked N/A—not available—wherever the column of Russian wheat appears. Frankly, it carries no “price” in the US dollar or any other hard currency, except in roubles.
There are neither buyers nor sellers for Russian origin cereal. As of today, Russian wheat equals “confusion” of worst kind. CBOT futures—which reflect movements of US-SRW (soft red winter) wheat, also used as an index for price movements—have captured these developments by maximum upswing of $40 pmt or 16% in last one month.
Pursuant to a steep fall in crude oil prices and US/EU sanctions on Russia for forcible occupation of part of Ukraine’s land space, the rouble has depreciated from 35 to 60 to a dollar since July 2014. Fifteen million tonnes of wheat export from July 2014, against an estimated evacuation of 22 million tonnes this year, is proving to be super-inflationary by 82% for domestic users.
Analytically, the price spike in the dollar is merely 8% for importing entity while exporter realisation in Russia is 82%-plus in fob terms (8,400 rouble in July 2014 and about 15,340 rouble in December 2014). Local authorities are concerned about high domestic prices/inflation and plan an inventory of additional 3.5 million tonnes (existing stocks 1.5 million tonnes) even at 11-12,000 roubles pmt while in July 2014 the domestic price was 6-7,000 roubles pmt. Given the fragility of the rouble, more exports may lead to more domestic inflation. New crop to be harvested in July 2015 is under threat from winter kill, another matter of concern.
The statements to rein in wheat shipments started emanating around early December 2014 from Russia’s officialdom. The first one was that Russia will issue phytosanitary certificates only to four countries (Egypt, Turkey, India and Armenia). The rest of the world stands excluded. (Phytosanitary documentation is issued by national plant protection organisations of each exporting country, certifying that consignments meet plant health regulations of importing nation, otherwise no grain of foreign origin can enter any importing country.) Russia’s decision is discriminatory and violative of the Trade Facilitation Agreement (TFA) of the WTO concluded in November 2014. But when a country is under acrimonious sanctions, why bother? Ships are stuck at Novorossiysk port for want of these certificates. Russian exporters are complaining of railcars not being made available for transportation to ports. Non-availability of grain at the port “technically” implies shutting down exports.
And the last straw on the camel’s back notified on December 26 is the imposition of 15% duty plus euro 7.5 pmt subject to minimum of euro 35 ($43) from February 1 to June 30, 2015. This will first prompt escalation of prices of all origins and then de-escalation after four months, thus injecting hyper-speculation and volatility internationally. What will be duty component in July 2015 is another mystery.
What do these conditions mean to wheat trade? It is neither a formal prohibition on export nor restrictive or open export policy. But it is a message—do not meddle with Russian wheat for the time being. All existing contractual commitments catapult to zone of confusion or shall remain unexecuted. Nor force majeure conditions can be enforced for defaults. Contractual commitments in Russia cannot be effectively litigated. Buyers will be in a huddle either to enter into fresh commitments or negotiate with sellers for alternative origins with cheaper values or seek compensation from sellers for reneging from contracts. To what extent hedging in CBOT futures of buyers/sellers will mitigate losses can be guesstimates.
Ukraine’s wheat shipments have touched about 8 million tonnes, of the total 10 million tonnes. Russian developments have also rattled its values with high volatility from a low of $235 fob in November 2014 to $260 last week. Ukraine prices could further flare up as they tend to converge with unpredictable Russian values. Trade will touch Ukraine origin at great risk and peril. For markets in West Asia, Africa and the Far East, two origins that will start competing more aggressively will be Australia and Argentina. French wheat, though cheapest, has a problem with quality. Argentine and US consignments have high freight component of about $40-45 pmt for handymax cargos—25-40,000 metric tonnes.
FCI from India can too chip in from January to April 2015. At this point, price of $275-280 fob can be secured during January-April 2015 to ship out 3-4 million tonnes, provided speed of tendering and decision-making is accelerated. This niche opportunity is WTO-compliant at $1=63.5 and translates to R17,476 fob against OMSS of R15,500 ($246) pmt plus freight R1,000 ($16) from Madhya Pradesh to Kandla port.
This is at par or better than current domestic realisation. No subsidy issue is involved like raw sugar export proposal, where WTO’s compliance concern has cropped up.
Around April 2015, FCI will get busy with next year procurement. If export momentum and premium is sustained, private sector can take up wheat export at MSP of R14,500 pmt from April-July 15 because Russian new crops will re-enter world markets with some “unknown conditions” around July 15 again. This will also result into lesser procurement by FCI. Indian price realisation could well be near $300 pmt fob with passage of time if Russian “conditional” exports continue.
The caveat is that these Russians measures are interim executive instructions which can be reversed any time probably under pressure by exporter’s/farmer’s lobby groups on the plea of accessing hard currency. To the extent this period of uncertainty remains, Indian food and commerce ministries may formulate effective strategies to take advantage of this low-hanging fruit.
Agro-exports of items like corn, cotton, sugar, soymeal are languishing for want of international parity. But here is a market opportunity knocking at our doors (call it “acche sitare” or “acche din”). It will be an utter disgrace if we miss this break when 10 million tonnes of wheat stocks at FCI are waiting to be liquidated with blocked funds and FCI continues to survive on high cost of borrowed capital.
The author is a grains trade expert