Uncertainty in Asia forward buying of Black Sea new crop wheat

Traders grapple with high freight prices, Russian tax changes and extreme weather concerns. What does this mean for forward bookings of new crop Black Sea wheat?

A lack of clarity on trading conditions in countries around the key Black Sea wheat origin markets means destination buyers are yet to commit to forward bookings of new crop supply from the region, opening opportunities for rival producing regions and potentially teeing up a rush to secure product while the picture clears.

This period of the new year is typically the point when attractive prices would tempt Asia-based buyers to commit to forward bookings of new crop Black Sea wheat for loading in July and August. But this year traders are grappling with high freight prices and Russian tax changes alongside the regular weather worries.

With the harvest still a few months away, expectations around production provide little in the way of help – particularly after last year’s generous forecasts had to be cut back sharply, as Ukraine’s corn traders found to their cost.

Alongside that, however, Russia’s new quota and export tax have added another layer of uncertainty, while firm freight prices are also complicating forward deals.

“The new crop Black Sea wheat started from high [price)] levels, and there are not many forwards in the books… much less compared with last year,” a broker said.

“This year smells different as we are walking into uncharted territories. A new crop is hard to ascertain now, there’s the weather, US supply and demand, corn and bean sales to China, and the Russian tax. It’s a lot of moving parts,” a trader said.

Russian tax
The Russian government said at the start of February it would impose a floating tax for wheat exports from Wednesday June 2.

The duty is expected to be calculated at 70% of the difference between the benchmark price, as provided by the country’s Moscow-based exchange, and the basic price of $200 per tonne.

Since the details for the new system are expected to be finalized by March 1, offers for the new crop Russian wheat have been pulled from the market over the last few weeks because sellers fear getting caught by the new rules.

At the same time, the loss of clarity in the Black Sea has created an opportunity for other origin suich as Ukraine, Europe and Australia because sooner or later buyers will have to start buying.

With Russia absent, the focus is expected to switch to alternatives, giving support to new crop prices across the northern hemisphere.

Ukrainian 11.5% offers for August loading are already at least $45 per tonne higher than indications at the same time last year. For now, exporters are not prepared to lower their offers.

“Ukraine gets a great opportunity here, without Russian [the price] doesn’t go down easily,” a second trader said.

Offers for new crop 11.5% for late July-August loading are at around $242-$243 per tonne PIPP, while buyers are at least $4 per tonne away.

Freight prices have been rising since the start of February, driven by short-covering and a surge in crude oil prices that has driven fuel costs higher, as well as a smaller fleet in the market – fewer new vessels were built in 2020 due to Covid-19.

This has meant a hard hit for CFR buyers, who were already struggling with firm commodity prices and kept them away from the market.

“Freight is a beast that is disrupting some stuff – that’s another factor to watch,” an Asia-based trader said, with another source highlighting that freight will also be dependent on the OPEC decision on increasing oil production and the state of world demand.

Currently, expectations are for freight rates to calm down in the days ahead but any pick-up in cargo flow as the northern hemisphere harvest lands could renew support.

Finally, on the weather side, dryness during the Black Sea winter crops planting period means that expectations for the forthcoming crop are already subdued.

While snow cover over most of the production regions in Ukraine and Russia has been even, there are small areas that have been affected by the sharp decrease in temperatures.

Alongside that, the conditions of US wheat plantings also far from ideal – much of the main growing regions are reporting drought conditions and more recently there has been extreme cold, snowstorms and frost, with potential damages still unknown.

This article, by Masha Belikova, was first published to agricensus.com on Wednesday February 24.

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