Good morning, Andrey. Could you tell me a little bit about yourself and your company?
After leaving university, I worked for ExportKleb, which at one time was the largest importer of grain into the Soviet Union. My father, Andrey Sizov Sr, founded Sovecon in 1991, and I joined in 1998.
Sovecon is the oldest established firm in the Black Sea analysing and closely following agricultural markets – mainly wheat, corn, some barley and oilseeds. In addition to our regular reports included in sizov.report service, we also do multi-client studies. We are a small company – about five people in total.
What is the biggest issue in the Black Sea grain markets today?
Officials in both Russia and Ukraine have little faith in free markets. They don’t believe that price can balance supply and demand. They want to take administrative control of their domestic grain markets, primarily by limiting exports.
A few weeks ago, the Russian Ministry of Agriculture published a proposal that, if accepted, would limit total grain exports, including wheat, corn and barley, to 15 million mt for the current season. That tonnage was in line with expectations, and the market did not react.
Russian domestic grain consumers – flour millers, farmers and animal feed manufacturers – argue that export quotas won’t be enough to stop an increase in domestic prices. They have written to the Prime Minister to ask instead for a tax on grain exports. They have requested the government set a threshold price in roubles, with a 50 per cent tax on anything above that threshold price.
I believe that both proposals are bad, but the second one will be tough to manage because of the currency risk between the threshold price in roubles and the export price in dollars.
How likely is it that the government will impose one or other of these restrictions?
There is a third possibility – that the government doesn’t do anything. I would rate the probability of export quotas at 60 per cent, export taxes at 30 per cent, and of the government doing neither, and perhaps proving some subsidies to local grain consumers, at 10 per cent.
The market is expecting export quotas; they are already in the price. The market is not expecting export taxes; they are not on the radar. If the government introduced them, it would catch the market on the wrong foot; we could see a market reaction.
What about Ukraine?
Local consumers are also not happy with domestic grain prices and have written to the government to ask them to limit corn exports. The government has already imposed soft limits on wheat exports, but there are no set penalties if you over-export. If the Ukrainian government imposed rigid limits on corn exports, it would come as a shock to the market.
Exports have been the primary driver of the growth in the Russian and Ukrainian grain sector over the past 20 years, and I am afraid that restrictions on exports would be detrimental to further expansion. They could be harmful in the long term for everyone in the supply chain, farmers, traders and firms investing in sea terminals.
Going back to Russia, couldn’t traders get around the proposed system by declaring lower prices on their export contracts?
I believe that would be impossible given the transparency of prices all along the supply chain. However, it may mean that traders make sales basis FAS (Free Alongside Ship) rather than FOB (Free on Board), or that they ship more from the lower-draught ports in the Sea of Azov, which trade at a discount due to higher shipping costs.
When do you think any changes might come into effect?
The government may try to publish the necessary decrees by the end of this year for validity in 2021.
Isn’t this all part of the Russian government looking to take control of every aspect of grain exports? The state-owned bank VTB is already a significant terminal and port operator.
You shouldn’t confuse the two issues. VTB is majority state-owned, but it is in their interest is to maximise export flows through their infrastructure. The government may want, for domestic political reasons, to reduce exports. The two forces are opposing, not complementary.
Do you see Black Sea exports continuing to grow in the medium to long term?
Ukraine does not have much land on which to expand its grain area, but the country does have plenty of room to improve yields. Average wheat yields are around 4 mt/ha; this compares with 6-7 mt/ha in the EU. Wheat yields in Ukraine could improve to 5-6 mt/ha. As for corn, average yields are currently around 6-7 mt/ha; this compares to 10-11 mt/ha in North America.
Russia also has considerable room to increase yields. Global warming has been beneficial to Russian agriculture. Milder winters have meant that farmers could plant more area under winter, as opposed to spring, wheat. Average winter wheat yields are around 4 mt/ha compared to 2 mt/ha for spring wheat.
Russia also has a lot of area that they could bring back into production. Potentially, farmers could bring in an additional 300,000 to one million hectares into production every year. It will mostly be in the Volga Valley region, which has relatively easy access to the Caspian Sea. It will facilitate Russia’s exports to Iran, a significant wheat and corn importer.
There is also some potential for Russia to expand corn and soybean areas in the Far East of the country; Russia could become a significant competitor in Asia for Northern and Southern American farmers.
How much do you expect Russia and Ukraine to export in ten years?
We estimate that Russia, including Crimea, will produce 85.5 million mt of wheat this season. Our figure for Ukraine is 25 million mt. Aggregated production is 110 million mt. We could see that increasing to 150 million mt in ten years.
We estimate the total corn crop in 2020 at around 45 million mt (31 million mt in Ukraine and 14 million mt in Russia). In ten years, this number could increase to 60 million mt.
That additional production is likely to result in a substantial increase in exports. We expect local consumption to grow at a slower pace, something around 0.5-0.7 per cent annually.
There are two significant obstacles to this. The first one is the governments’ actions – we hope to see more freedom and less export control in both countries. Our industry doesn’t need subsidies, nor does it require state investment. All we need is the freedom to grow and remain competitive.
The second one is global warming – so far it has been beneficial for the region, but medium-long term things could start to change. It could put the southern areas of Ukraine and Russia in a risk zone with a higher probability of drought and crop failure.
We are possibly already seeing this. The 2020 crop was a disaster for many farmers in Odesa (southern Ukraine) and Kuban (south Russia) because of a lack of precipitation. The outlook for 2021 is rather grim again for Russian South after another dry autumn. This issue could be addressed by the rapid introduction of new drought-resistance varieties. Still, these new varieties are being developed with gene-editing methods which are officially forbidden in both countries.
Thank you, Andrey, for your time and inputs.
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Jonathan’s book, ‘Out of the Shadows – The New Merchants of Grain’ is available on Amazon.