2018 Grain Market Forecast

Judging by the Russian press publications, last year’s problems of the Kazakhstan grain companies will continue to persist this year unless Akorda finds a way to solve them.

To confirm that, we will cite a Kommersant article published under the scandalous title «Ukraine Dusted with the Russian Grain» (text in bold here and later — Kazakhstan 2.0).

«In the current season, for the first time in history, Russian, forcing off Ukraine, may become a second biggest grain exporter. The total volume of the supplies may reach 44-48 mln tons. The record-setting heavy crop, good weather, and low domestic prices will assist in achieving this result».  

«According to the results of last year, Russia occupied the fourth place on the list of the world grain exporters after the US, Ukraine, and Argentina. Based on the Ministry of Agriculture’ data, starting from the beginning of the season to January 17, Russia had increased grain supplies by 36,4% to 29 mln tons in comparison to the same period last year. The wheat supplies grew by 35% to 22.6 mln tons

The main reasons why Russia may be able to become the world second biggest grain exporter are these — the record-setting heavy crop and the huge carry-over stocks that have ensured the high supply level, believes Director of Sovecon Andrey Sizov. Export is the main trade channel for the Russian crop, the whole infrastructure is working at the end of tether, says the CEO of the Institute of the Agrarian Market Trends Dmitry Rylko.

The Ministry of Agriculture estimated that, in 2017, Russia harvested 134.1 mln tons of grain which is 11,2% higher than the year before and by 35,3% exceeds the average harvest level for the years 2012 — 2016 (98.1 mln tons). The wheat harvest (85.8 mkn tons) exceeded the 2016 level by 17,1% and exceeded the average indicator for the last five years by 1.5 times. According to the Ministry’s estimates, the carry-over grain stocks in Russia, as of July 1, 2018, will consist of 20.7 mln tons. Thanks to the good weather, there were less sea-storms, the shallow-water ports froze later. The attractiveness of the export was also ensured by the low domestic grain prices, says Mr. Sizov».

Expert.ru follows the Kommersant’s rhetoric. Here is a quote from the publication entitled «The Russian Wheat Is Bought by Half the Planet».

«In 2017, the Russian food export grew by a quarter and amounted to 19 $ bln. Egypt restored its leadership as the biggest importer for the first time in five years».

«The accelerated export growth can also be explained by the jump in the exports of the frozen fish and sugar. However, as in the previous years, the major share of the food export still belongs to wheat that is being supplied by the Russian farmers to half of the planet’s countries. Last year, Russia yielded the spot of the main wheat exporter to the US. This year, however, there is no doubt that it will get it back. In general, the wheat export, according to the Sovecon data, has almost reached the record of 50 mln tons.  From July 2017 to January 2018, Russia exported 48 mln tons of grain. According to the estimates of the Ministry of Agriculture, in the 2017-2018 season that ends on June 30, 2018, the wheat export will reach 45 mon ton which is significantly higher than last season’s indicators (35.5 mln tons). 

«By the way, China’s Government Acquisition Quality Assurance (GAQSIQ) has recently lifted the 2016 ban to import the wheat from six Russian regions in the Urals, Far East, and Siberia (the ban was imposed due to the Indian and dwarf bunt outbreak). 10.3 mln tons of wheat were collected in these regions last year.

The wheat export is likely to continue growing. Right now, Tehran is talking to Moscow about buying 1 mln tons of the Russian wheat. The Iranians want to supply flour to Afghanistan and Iraq. Currently, the Iranian flour producers operate at 50% of their capacity. In 2018, Iran’s wheat demand is to reach the record-setting 18.4 mln tons which significantly exceeds the domestic production (not more than 15 mln tons). The Russian export food market is actively growing. In the nearest future, a significant increase of the grain supply to Thailand, Indonesia as well as to the Latin American countries including Mexica is expected. Russia, by the way, owns a good part of the European food market (12%) which is almost 2 $ bln in money terms».

Judging by this information, the Russian grain producers have not only limited the export possibilities of their Kazakhstan competitors since the latter practically have to force their way to the international market through the Russian territory but also started to steal the neighboring countries’ market including China and Iran.

An information that is even more threatening for the Kazakhstan producers was presented in an RBK article «How Russia Has Become the World Wheat Export Leader».

«The active growth of the grain collecting against the backdrop of the slow domestic consumption increase is the reason for the accelerated export growth. The food consumption is relatively stable — despite the income drop, the consumers in general are not eager to switch to the bread and macaroni products. Feedstuff — increasing against the backdrop of the continuing rapid growth of the meat and poultry production. The producers have adapted to the limited consumer demand. However, generally, the consumption growth constitutes several million ton a year as a maximum.

As for the grain production, in general, starting from 2000, it has grown more than twice — from 65 mln tons to 135 mln tons in 2017. Of course, if we are to look at the more precise average values for, say, the last five years, the growth will not seem that fast — on average, from 76 mln tons for the period of 2000 — 2004 to 112 mln tons for the period of 2013 — 2017. But, in any case, 135 mln tons is the highest record ever. The previous record had lasted since 1978 when the RSFSR collected 127 mln tons — the fact Putin mentioned with pleasure in his Federal Assembly address».

«Freedom is the main reason for the production growth. First of all, the freedom of entrepreneurship that the former members of the collective farms received following the disintegration of the fantastically ineffective planned Soviet agriculture. Now there is no one to tell them what to produce, to whom to supply their product, and at what price. Second, it is the freedom of land management since now Russia has the institution of private ownership of the agricultural land and its long-term rent. Third, there is the freedom of foreign trade — the Russian farmers have obtained the right to export their products to the entire world market. All these new rules of the game had already been established in the 1990s — the beginning of the 2000s and began to bear fruit years later». 

«We have been lucky in terms of the prices as well. From the mid-2000s to 2012, the prices at most trade markets were growing and the grain market was no exception. Starting from 2012, the prices had been actively decreasing to stabilize at the historically low level during last years. It was detrimental to the farmers’ earnings around the globe. For the Russian farmers, however, the situation was muffled by the 2014 devaluation. The weather helped, too. For Russia, the global warming means the progressively warmer winters. Thanks to this, the share of the winter wheat whose prolificacy is significantly higher than that of the spring wheat is constantly growing. In 2016-2017, we were lucky in terms of the precipitation. The cool and rainy summer of 2017, as we had expected, ensured the record-high harvest of that year».

«The total grain supply in the current season that consists of the carry-over stocks and crop is estimated at about 155 mln tons, the domestic demand — not more than 80 mln tons. The export potential, therefore, can theoretically be estimated at both 60 mln and 70 mln tons. In fact, however, a much lesser quantity will be exported for the lack of the port capacities. Despite their rapid growth during last decades, they are still unable to catch up with the supply increase. There is also the fact that it is impossible to export the grain via the Ukrainian ports that, in the previous years, were sometimes used for exporting a part of the grain supply».

«At least for the duration of the next season, Russia, once again, will be a large grain exporter. To a large extent, it is determined by the high carry-over stocks and the good harvest forecast. In general, however, the sustainability of the growth raises some questions». 

From the cited publications, it follows that, during the next season (from July 1, 2018 to June 30, 2019), the Russian grain producers will remain the main competitors of the Kazakhstan grain-producing companies. Moreover, they will (willingly or not) continue to impede on the Kazakhstan producers’ exporting their goods since they will load both the Russian carriers and the Russian ports with the Russian grain. And it would be difficult for Kazakhstan to reach for the Ukrainian and Baltic ports since it would also require crossing the Russian territory.

By our estimates, it will be non-feasible to solve this problem via the administrative means.  And there are still not enough market mechanisms to do that. To confirm our assessment, we will cite an article published on the 365info.kz website called «The Wheat Export Shrinks 3 times in 5 Years».

«Wheat remains one of Kazakhstan’s main export goods, however, the demand for it at the foreign markets is decreasing. Starting from 2012, the sales revenue has dropped almost three times and the producers have not only exited the Near East markets but also significantly lost their influence in the CIS countries.

According to the Kazakhstan Statistics Committee data, for the period of January — October 2017, Kazakhstan exported 3 mln 149.8 thousand tons of wheat and meslin in the amount of 493.4 $ mln. These numbers are significantly lower than the previous year’s indicators — the supply volume decrease constituted 13%, the sales volume decrease constituted 12,3%. On the other hand, it is certainly nothing new for the industry: in the last five years, the indicators have shown growth only one time. Compared to the period of January — October 2012, the foreign supplies volume decreased 2.2 times (from 6.8 mln tons), their sales revenue decreased 2.9 times (from 1 $ bln 418 mln)».

«Here is what the list of the main non-CIS buyers of the Kazakhstan wheat looked like five years ago (based on 10 months results).

Turkey — 968.7 thousand tons for 211.3 $ mln

Iran — 554 thousand tons for 127.5 $ mln

Sudan — 346 thousand tons for 81.6 $ mln

Yemen — 337.6 thousand tons for 79.7 $ mln

UAE — 310 thousand tons for 68.5 $ mln

China — 188.6 thousand tons for 39.5 $ mln

Egypt — 144.4 thousand tons for 33.2 $ mln

Out of all the Arab countries, only Iran and Turkey show interest in the Kazakhstan wheat (Iran imported 8.4 thousand tons for 1.5 $ mln in January — October 2017; Turkey imported 78.2 thousand tons for 16 $ mln). Thus, the Middle Eastern market has, in fact, been lost for Kazakhstan even though, as recently as in 2012, it brought 601.8 $ mln to the Kazakhstan producers for a 10-month period which is 22% higher than what all the wheat export to all the countries is today».

«The wheat supply decrease could have been justified by the growth of the flour export since flour is an added-value product. However, this did not happen, either. The volume of the foreign sales for the period of January — October 2017 constituted 1 mln 736 thousand tons (356 $ mln) which is higher than the 2013-2015 indicators but still lower than the 2012 indicators (1 mln 925 thousand tons for 499 $ mln) and even the 2016 indicators (1 mln 867 thousand tons for 395.1 $ mln). With that, in money terms, the export volume has reached its minimum during these past years».

Therefore, we may predict that, this year, once again, Akorda will be forced to use such an extreme measure as the massive grain purchase for the state resources. The problem, however, lies in the overproduction of grain (first of all, wheat) in Kazakhstan, and this problem cannot be resolved in a single year. Even though it is possible to preserve the food grains for years, there will be significant losses in the quality and value. Thus, it is not yet clear whether the elevators will be able to put another couple of millions of tons of wheat into the state reserve and, if they will, whether they can preserve them. As we recall, the scandalous disappearance of 5-6 mln tons of grain has already taken its place in the recent history.


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