CLICK LINKS BELOW--
WITH EXPORT DUTY, RUSSIAN
WHEAT SHIPMENTS OFF THE RADAR
“ACCHE SITARRE” FOR INDIA TO PUSH ITS WHEAT EXPORT AT BETTER PRICES
Tejinder Narang
Russian milling wheat— world’s
most traded wheat of 11.5%-12.5% protein-- has suddenly disappeared from the
trading kitty of international traders in last fifteen days. What is the export
price of Russian “milling wheat” today? Trade reports are marked N/A—“Not Available”
wherever column of Russian wheat appears. Frankly, it carries no “price” in 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.
RUSSIAN EXPORTS AND PRODUCTION
Pursuant to steep fall in crude
oil prices and US/EU sanctions on Russia for forcible occupation of part of Ukraine’s
land space, rouble has depreciated from 35 to 60 to a dollar since July 2014.
Fifteen million tons of wheat export from July 2014, against estimated
evacuation of 22 million tons this year is proving to be super inflationary by
82% for domestic users (see graphics).
RUSSIAN PRICES IN DOLLARS AND ROUBLES INCLUDING EXCHANGE RATE
Analytically, price spike in USD is merely 8% for importing entity
while exporter realization in Russia is plus 82% in fob terms (rouble 8400 in
July2014 and about 15340 in December2014). Local authorities are concerned
about high domestic prices/inflation and plan an inventory of additional 3.5
mill tons (existing stocks 1.5 mill tons) even at 11-12000 roubles/mt while in
July 2014 the domestic price was 6-7000 roubles/ton. Given fragility of
rouble, more exports may lead to more domestic inflation. New crop to be harvested in July 2015 is under
a threat from winter kill, which is also a matter of concern.
The statements to rein wheat
shipments started emanating around early December 2014 from the 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
world stands excluded. (Phytosanitary documentation
is issued by national plant protection organizations 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 Trade Facilitation Agreement (TFA) of 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. Secondly, Russian exporters are also 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 camel’s back notified on
26th December is the imposition of 15% duty plus Euro 7.5 pmt
subject to minimum of 35 euro ($43) from 1st Feb to 30th
June2015. 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 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. The buyers
will now 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 guess-estimates.
COMPETING ORIGIN PRICES
Ukraine’s
wheat shipments have touched about 8 million tons out of total 10 million tons.
Russian developments have also rattled its values with high volatility from 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 Far East two
origins that will start competing more aggressively will be Australia and Argentina
(see graphic). French wheat though cheapest has a problem with quality.
Argentina and USA consignments have high freight component of about $40-45 pmt
for handymax cargos—25-40000 metric tons.
FCI from India can too chip in from Jan to April 2015. At this point,
price of $275-$280 fob can be secured during January –April 2015 to ship out
3-4 million tons, provided speed of tendering and decision making is
accelerated. This niche opportunity is WTO compliant at 1$=63.5 and translates
to Rs 17476 fob against OMSS of Rs 15500 ($246) pmt plus freight Rs1000 ($16)
from Madhya Pradesh to Kandla port. This is at par or better than current
domestic realization. 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 Rs 14500 pmt from April -
July15 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 realization could well be
near $300pmt 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 anytime
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 sitaarre” or “acche din”). It will be an utter
disgrace if we miss this break when 10 million tons of wheat stocks at FCI are
waiting to be liquidated with blocked funds and FCI continue to survive on high
cost of borrowed capital.
