This is an article from Business Line ePaper appeared on 8th March, 2014
Please click on the following link to read :
http://epaper.
SIDE- EFFECTS OF
UKRAINE ON GRAINS
Tejinder Narang
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.
Uncertainty
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 suffers
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.
India Benefits
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.
Side effects
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.
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