This is an article from Business Line ePaper appeared on 8th March, 2014
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SIDE- EFFECTS OF UKRAINE ON GRAINS
In last week of February 2014, Ukraine’s erstwhile President Yanukovych was deposed. He is now sheltered by Russians and another opposition leader has taken control of the country. Russian President Putin has initiated military intervention in Ukraine while US/EU are threatening to counter such an intrusion.
These developments have intensified fiery hostilities between pro and anti- European protagonists within this former state of Soviet Union. It may plunge the country into an economic quagmire, not to speak of the possibility of disintegration based upon regional ethnicity. The adage that Rome was destroyed from within is equally applicable here due to deep-rooted fissures within Ukraine’s own social, cultural and political factions. Eastern Ukraine with majority of Russian origin population is unwilling for an open alliance with EU contrary to the empathy of pro-European regions around Kiev and its western territories.
Riots and killings have followed. Its currency has depreciated by 12% since beginning of 2014. Despite surpluses and abundance of grains, logistics and force majeure conditions can soon restrict its exports.
In recent Egyptian wheat tender finalized on 27th February 2014, Ukraine wheat was not offered by any of the 10 multinational traders. This lends confirmation that market perceives operational bottlenecks in origination—whether be at ports of Yuzhny/Odessa/Illichevsky or movement of cargos from inland to ports. Iran is finding difficult to obtain its maize shipments from Ukraine, has put its agreements on hold and has diverted sourcing from Hungry.
Chicago Board of Trade (CBOT) futures climbed 4% and 2% respectively for wheat and corn on the news of likelihood of Russian aggression on 3rd March 2014. Ukraine’s isolation and passiveness will mean higher international prices of grains, including those from Russia, that will expedite Indian wheat exports both from FCI and open market ( above 5 mts) and also accelerate sluggish pace of corn exports.
Ukraine sells world’s cheapest wheat (maximum $340-$355 fob/metric ton in 2011 and 2012 to minimum 240-250 fob in 2013). Its fertile land and good weather has upped its wheat output 20% and corn production by 40% from last year, peaking to 24 million tons (mts) and 30 mts respectively. Estimates of exports under normal conditions are pegged at 11mts of wheat and 16mts of corn which is 8% and 16% of the world trade of these two agro commodities.
But its plans to attain (11+16) 27mts of export evacuation are now uncertain. In last eight months of the marketing year 2013-14, it has shipped out 7mts of wheat and 14mts of corn. Reports are emanating that-- Ukraine’s wheat prices have recently risen by $3-$11 depending upon the grade, maize value by $5/mt, farmer selling is less and domestic values will continue to move up.
Indian contracting of wheat export in 2013-14, from FCI/PSUs, scaled down to minimum by end February2014. Out of 2 million tons authorised, only 1.3 million tons was contracted as world prices dropped by 10% in last two months. Buyers were bidding at $262-$270 fob. But in first week of March 2014, sensing trend reversal owing to Ukraine crisis, Glencore scooped 160000 tons of Indian wheat in one shot at $275 –almost at parity with Black sea values--though cabinet nod is for minimum export value of $260fob. A stroke of good luck for Indian wheat!!
Indian corn exports which peaked at about 4.6 mts in 2012-13 may not touch 3 mts as Indian feed grain has to contend with availability from Ukraine, Brazil, and Argentina. Ukraine’s crisis and Brazil’s uncertain climate may stimulate some extra corn shipments from India.
Should the external conflict and civil strife extends longer, the outflow of grains will trickle down, supply of gas for Russia may be endangered affecting availability of power, its currency “haryvina” (UAH) may steeply decline, default on existing debt is a real possibility, grains of old crop will remain stored, uncertainty of new crops will loom large. This will diminish world supplies of grains.
If some peace resolution emerges shortly and Ukraine somehow restarts grain exports effectively with bailout package organised by USA, EU, IMF tagged with reforms but with heavily depreciated currency, dollar values will be much lower and that will hurt India and other competing sources. Possibility of rouble depreciation are also not ruled out, making Russian grains cheaper too at post crisis stage.
The period of great price volatility and instability are the imminent side –effects of Ukraine’s messy situation.