AgriCensus

Grain markets wait and watch as tensions mount over Azov Sea

Black Sea grain markets were unmoved during early trade Monday despite increased tensions on the Azov Sea after the Ukrainian and Russian navies clashed on Sunday, sources have told Agricensus.

Several Ukrainian sailors were injured and three naval vessels were seized after a Russian tanker blocked access to the Azov Sea via the Kerch Strait on Sunday morning.

Global grain markets shrugged off the news, with the cash trade opting to sit back and watch the political situation unfold rather than moving bids and offers.

The bulk of Ukraine’s grain exports leave via ports in the south west of the country, with its Azov Sea ports accounting for just 6% of total grain volumes during October, according to port line up data.

Other markets were also calm, with Black Sea wheat and corn futures in the cleared and bilateral markets steady from Friday.

“Ukrainian clients don’t seem that worried, there’s not been any aggressive buying or selling so far,” one futures broker told Agricensus.

Major US wheat contracts were up in overnight trading, with SRW March up 1.1% to $5.1275/bu and HRW up 0.6% to $4.89/bu – although traded volumes were thin.

The ruble fell about 1% against the dollar over the weekend to 12-day lows, while the hryvnia was unchanged.

Operational

Freight markets were touted as the most likely to experience volatility in the short run.

“The main thing is that owners are not to willing to go to the Azov Sea because at any time the Kerch Strait may be blocked,” a Black Sea grain trader told Agricensus.

“This is going to be main obstacle, but it is all about how much people are going to be willing to pay for the freight,” he said.

There are potential longer-term operational implications should Kyiv pass an emergency security bill, with increased security and border checks likely to add to costs.

A proposal to introduce 30 days of martial law has been tabled by President Petro Poroshenko and is due to be voted on by parliament on Monday.

History

Access to the Azov Sea has threatened to be a flashpoint in tense relations between Moscow and Kyiv since Russia annexed Crimea in 2014, with an increase in tit-for-tat naval skirmishes seen this year.

In July, Ukrainian ministers called for international support after complaining that vessels docking in Mariupol and Berdyansk were being stopped and searched for several days at a time by Russian forces.

And in August, Ukrainian authorities seized a Russian-flagged oil tanker that docked in Kherson, claiming its owner was on a register of international sanctions.

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ANALYSIS: Three ways Brazil’s president elect could impact ag markets

An opponent of environmental protectionism, a proponent of free markets and backed by Brazil’s huge agriculture industry, in six weeks’ time President-elect Jair Bolsonaro will take office.

Voted in on a promise to clean up Brazil’s crime-ridden streets and corrupt politics, Bolsonaro’s convincing 55-45% second-round election victory is expected to see the country shift sharply to the right of the political and economic spectrum after four terms of left-wing governments.

With unemployment at 13% and a staggering 14 million people out of work, Bolsonaro’s priorities are to cap pension spending, reform the tax system and get one of the world’s biggest agrarian economies moving again after two years of recession.

Outlined below are three ways in which the president-elect could also have an impact on agriculture policy.

Scrapping the minimum freight table

Tearing up the previous administration’s policy on setting minimum freight rates for trucks could be a quick start for Bolsonaro and his pro-free trade economist and likely finance minister Paulo Guedes.

Last week Bolsonaro said that he personally was not in favour of the policy, which was passed in the summer this year as a way of appeasing truckers who were striking over higher diesel prices.

He said his team would propose a solution once he takes office.

“To negotiate and change the freight table won’t be easy even for the new government. Farmers might have big influence in Congress… but truckers (and transportation companies behind them) are able to stop the country, like they did in May,” said Daniele Siqueira, a consultant with Agrural.

However, the current macroeconomic picture may have made that choice easier for him.

With soybean prices at Brazilian ports nosediving on the expectation that a thaw in China-US relations might see the former turn to the latter for beans, Bolsonaro will likely come under huge political pressure from farmers to drop the freight plan.

And the latest currency and oil price moves could potentially switch lobbying power from truckers to farmers as diesel prices in domestic currency terms have fallen sharply.

With WTI at $55/bbl, international oil prices are now 15% cheaper than at the time of the strikes, while the real is largely unchanged after collapsing in Q3 then firming in Q4 after the election.

“Whatever the outcome, this will continue being a headache for Brazilian farmers and agribusiness (as it) is restricting deals in forward sales or sales for future delivery in the Brazilian soybean domestic market,” said Steve Cachia, an analyst at Curitiba-based brokerage Cerealpar.

Chances and impact: Possible and large

Export tax

Earlier this month, a biodiesel lobby group called on the government to slap a 10% tax on soybean exports in a bid to shore up crush margins in Brazil, which have suffered due to high soybean prices.

With exports of soybeans likely to increase 20% on the year to over 80 million mt due to rampant Chinese demand, crush rates have slowed in Brazil.

Yet this comes at the same time the country is increasing its biodiesel mandate, which is likely to boost demand for soyoil – a product of crushing beans.

With farmers seen to be turning in record revenue due to the high prices, the idea of an export tax was floated to boost crush margins and rates.

However, it is not seen as a priority for the current administration.

“It’s hard to know [what will happen]. There is a new government being formed. But the big crushers are the same guys who are the big soy exporters. These guys put a lot of money in assets to export soybeans. I don’t think it would be so good for them to lobby for this,” said one exporter in Brazil who declined to be named.

Furthermore, the issue of high soybean prices could be cured later this month should China and the US agree to unwind import taxes on each others’ goods at the G20 meeting in Buenos Aires.

And even if it is not, Bolsonaro is unlikely to do anything to annoy one of Brazil’s biggest trading partners when his priority is to boost trade.

“I don’t think he will take any step to endanger our relationship with China, for a very simple reason: Brazil is nothing without China, which is now our number one commercial partner, not only in soybeans, but in general,” said Agrural’s Siqueira.

“Bolsonaro might have said some silly things about China when he was a representative and during his presidential campaign, but now, as president-elect, he works with a very good team. People around him are aware of China’s importance and will help him keep a good relationship with the Chinese,” she said.

Chances: Unlikely and minimal

Opening up the Amazon

On the campaign trail, Bolsonaro promised to withdraw Brazil from the Paris Climate Accord, merge the nation’s agriculture and environment ministries and open up areas of the Amazon to mechanised agriculture, logging and mining.

He has said conservation reforms hinder economic development and that indigenous communities protected by them would much rather have “electricity, television, blonde girlfriends and the internet” than forests.

However, once in office, the rhetoric has calmed down, most notably on withdrawing from the Paris Climate Accord and backtracking on merging the ministries, the latter on lobbying by farmers.

Yet that hasn’t allayed fears in environmental lobbies who are concerned that he will backtrack on biodiversity commitments.

The biggest impact this policy could have on the international agriculture markets would be long-term and by expanding soybean production.

Under national legislation dating back to 1965, landowners must keep up to 80% of their land in the Amazon forested, sparking debate about the benefits of environmental protection and whether it hinders economic development.

However, the former army captain is keen to unwind the impact of that law on certain areas so mechanised farming, mining and logging can take place in certain areas and help the country kickstart the economy.

“Eventually a balance will have to be reached and this will depend on the agribusiness and environmentalist lobbies. One thing seems to be clear, the concept is to use the Amazon in a responsible and sustainable way, but also make it an instrument for economic growth,” Cachia said.

In any case, he could be hamstrung by Congress, where power lies for changing the legislation.

Regardless, a bigger threat to prices would be an improvement in yields rather than an expansion in area, observers say.

Chances and impact: Likely and minimal

 

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vegoils, meals and freight price assessments
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