Feed ingredients in short supply following Ukraine invasion

UKRAINE WAR: RAW MATERIALS

World’s ability to make up for the deficit of Black Sea grains and oilseeds limited

Feed ingredients in short supply following Ukraine invasion

Russia’s invasion of Ukraine in late February has caused massive volatility in agricultural commodity markets. This is understandable, given the importance of both countries in the production and export of critical grains and oilseeds.

According to Andrée Defois, Managing Director of Stratégie

Grains, a sister service of Feedinfo offering supply and demand forecasts for major food commodities, the market braced for the biggest disruption is certainly sunflower oil. Ukraine alone is responsible for about 50% of global exports, she says; together with Russia, the two countries currently at war account for 80% of global exports. There is, therefore, literally no other country in a position to step up and replace anything close to the volumes being produced around the Black Sea.

Moreover, Ukraine still has large existing stocks of sunflower to crush. “If Ukraine is not able to get these volumes transformed and sunoil exported out of the country, a lot of countries, and especially the EU, India, and China, will definitely have to reduce their consumption,” predicts Defois.

The grain situation is also quite tense. In wheat, Ukraine and

Russia together represent 30% of global exports. Defois says that as of the date of the Russian invasion, for the current marketing year through to the end of June, an additional 8-9 million tonnes had been expected to ship from Russia and 5 million from

Ukraine. Should this wheat fail to show up on global markets, a few countries may be able to supply greater quantities — Defois suggests Australia, India, and parts of Europe — but the total will still fall short: “all these countries together will not be in a position to replace, like that [in a short time period], about 14 million tonnes of wheat.”

That scramble for replacements is made even harder by last summer’s drought in North America, meaning alternative supply from Canada or the US will be unavailable for the end of the 2021/22 marketing season. “Consumers will have to switch, to reduce consumption, or maybe to wait for the next season.”

Effects will be widespread, given the extensive reach of Black Sea wheat, which is shipped to destinations around the globe. “I would say nearly the entire world will be concerned.”

On corn, Ukraine represents nearly 20% of global exports, and was expected to play an especially important role this season, given the size of the crop. Of the 33 million tonnes expected to be exported this marketing year, about 13 million remained in the country when it was invaded, slightly less than half of which was destined for the EU. So, concludes Defois, in a worst-case scenario where none of those exports actually ships from Ukraine, “the impact on the European Union will be very sharp.”

Meanwhile, all of this is happening in the context of massively high raw materials prices independent of the war, just based on the supply/demand fundamentals — drought, La Niña, demand for crude oil and biofuels recovering post-Covid, and the palm oil sector’s acute labor shortage. “The situation was very tight, and the Russia/Ukraine problem comes as a new factor… we were thinking that prices had already matched their highest level. But now with Russian exports lower than estimated before, and Ukraine going out entirely from the scene, then the situation becomes explosive again.”

Early impacts on Ukrainian and Russian products

Touching base on the situation five weeks after the invasion, Defois observes that exports out of Ukraine have effectively stopped: ports are out of operation, infrastructure has taken damage, and the Ukrainian government has placed restrictions on the export of some commodities, although those have evolved throughout the month of March.

On the Russian side, though, she says things are “not as bad as expected”; whereas Stratégie Grains’ original post-invasion projections put wheat exports for the month of March at 1 million tonnes, they have more recently been observed to be closer to 2 million.

“Now the question is, will this last until the end of the season, the end of June? Or will we see some flows decrease over the coming months?”

Defois says Stratégie Grains predicts some decrease, based on the impacts of sanctions which will increasingly make themselves felt throughout April and May, the difficulties in shipping from the ports of the sea of Azov, and the hesitation of some businesses to deal with Russia.

However, dire predictions of the impacts on Russia’s exports made at the beginning of the conflict are now being revised downwards. For example, before the invasion, Stratégie Grains had

UKRAINE WAR: RAW MATERIALS

Stratégie Grains expects Ukraine’s wheat crop for next season to be down by around 33% compared to pre-war estimates, and next season’s corn to be down by around 40%.

originally forecast Russian wheat exports would reach 33 million tonnes for the marketing year through the end of June; in the early days after the invasion, it was forecast that this number might need to be reduced by as much as 5-8 million tonnes; however, today, the company believes Russia will still manage exports of 30-31 million tonnes, only 3 million less than originally expected.

“Some people in the market are saying that the only impact of the conflict [on the agri-commodities markets] concerns Ukrainian exports. We don’t agree with that. We observe, and we forecast, that it is impacting Russian exports as well, but at a lower magnitude.”

Predictions for next season

Defois predicts the 2022-2023 season will remain disrupted by the war, due largely to the sizeable reduction in Ukrainian wheat and corn.

Ukrainian corn should be sown now, she explains, but many farmers can’t go into their fields; wheat was sown in the winter, but it also seems unlikely farmers will be able to harvest.

“We have anticipated that the wheat crop could be reduced by about 1/3 in Ukraine compared to what was estimated before the war. We have estimated a close to 40% reduction for the maize crop as compared to what was estimated before the war,” she asserts.

This will have knock-on effects for the global supply. Stratégie Grains’ pre-war forecasts expected global wheat production to be up 25 million tonnes on last year (a year characterised by drought and exceptionally tight supply), but are now only expecting a 12 million tonnes increase on last year.

Meanwhile, 2022-2023 corn production is now predicted to be stable compared to this year, a 17 million tonne reduction compared to the estimates of February. Beyond the impacts of reduced production in Ukraine, there are also the behaviours of other producers to consider; Stratégie Grains predicts that skyhigh fertilizer prices will drive some US maize farmers towards soybeans instead, aggravating this deficit.

Indeed, while the tight supply situation could incentivise farmers in other parts of the world to expand their production of grains and oilseeds to make up for the deficit from the Black Sea, Defois warns that rising input prices may limit their ability to do so.

“Despite high prices for their crops, we think the increase in areas [planted] will be rather moderate, even for the 2023 harvest.”

Supposing average prices remain quite close to those in 20212022, this could of course have grim impacts for industries whose fortunes are closely tied to those of the grains industry, like swine production.

“Pig margins are very low in the EU. Despite the aid package decided recently by the EU Commission, we forecast a sharp reduction in pig compound feed production for the 2022/23 season,” says Defois.

Going forward, she says it will be very important to follow how inflation in everything from crude oil to nitrogen to food will impact demand.

“We have already revised downward, by less than 1%, our forecast for global wheat demand for the next season, but it could be the case that it has to be reduced far more drastically.”

Stratégie Grains offers a variety of tools to follow the latest development of the export situation in the Black Sea, and the global supply and demand environment for agri-commodities more generally. These include a Line Up tool to track ships and get figures on raw materials exports before customs data are available, a regularly-updated list of open tenders along with the results when available, and of course the company’s flagship supply and demand forecasts.

Learn more at www.strategie-grains.com By Shannon Behary, senior editor