Ukraine turmoil may resolve itself | Export market buoyed by U.S. drought and uncertainty in Ukraine
Farmers should seriously contemplate locking in wheat futures values because one factor propping up prices may not be around in a few months, says an analyst.
“There are two primary things that have been supporting the markets: one is the U.S. hard red winter wheat situation and one is Ukraine,” said Bruce Burnett, a CWB weather and crop specialist.
Drought in the U.S. winter wheat growing area is a tangible factor that can be measured on a weekly basis, but political turmoil in Ukraine is an entirely different beast.
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“It’s probably even harder to predict than the weather,” said Burnett.
Grain markets are nervous about the potential for an escalation in the conflict between Ukraine and Pro-Russian separatists.
Ukraine is the world’s third largest exporter of wheat, corn and canola and a major competitor for other crops grown by Canadian farmers such as barley, flax, pulses and special crops.
The conflict is causing currency devaluation and tighter lending conditions, reducing the ability of Ukrainian farmers to afford seed, fertilizer and other crop inputs.
Farmers tend to be less inclined to sell grain under those conditions because it is a hedge against rapid inflation.
There are also fears the conflict could disrupt exports spurred by recent uprisings in Odessa, which is Ukraine’s largest port.
Grain markets have created a risk premium for the political turmoil in Ukraine.
Burnett said it is a significant factor in wheat prices, but it is impossible to quantify.
“As long as there are Russian troops on the border and towns that are occupied and the potential for something to happen, there will always be a little bit of a risk premium in there just because you don’t know when it’s going to escalate,” he said.
“If tanks roll and missiles fly, we ain’t seen nothing yet.”
But what happens if tensions ease, farmers produce a big crop and exports flow unimpeded out of Ukrainian ports by late summer?
“That’s when the trade gets a little more comfortable with the situation,” said Burnett.
“The risk premium that we have could disappear if we see exports starting in early August from the region go off like clockwork.”
He believes that is the more likely scenario and something farmers should consider when making their marketing plans.
“If you want to take some risk off the table, current prices are looking very, very good on the futures side at least, anyway,” said Burnett.
Brenda Tjaden-Lepp, chief analyst with FarmLink Marketing Solutions, agreed that farmers should consider locking in a good portion of their anticipated 2014 wheat crop at today’s values.
Her clients are already 30 percent sold on new crop.
“If I was a farmer who wasn’t yet 30 percent sold, I would definitely be getting caught up to our recommended levels into the current strength,” she said.
Tjaden-Lepp said it is quite possible that the Black Sea region will produce and export a normal crop, which would have its usual bearish influence on prices.
“I think those stocks will come to market at super-discounted values and that’s going to take away demand from other parts of the world.”
FarmLink wants its clients to back-end load sales of the remaining 70 percent of their wheat crop, holding off on selling it until March when the cheap Black Sea wheat has worked its way through the system.
Tjaden-Lepp said the wheat market looks flat for 2014, but there could be a significant improvement in basis levels by March because Canada’s railways should have worked through a lot of the grain backlog by then.
“If the futures stay flat, we should be seeing a $1 per bushel better basis across Western Canada by next March or whenever the system clears,” she said.
Markets are expecting reduced corn and wheat production in Ukraine this year. A Reuters survey of 11 traders and analysts produced a median forecast of 25 million tonnes of corn, down 19 percent from last year.
The U.S. Department of Agriculture is calling for 26 million tonnes of corn, down 16 percent from last year. Exports would also be down 16 percent.
The USDA is forecasting 20 million tonnes of Ukrainian wheat production, down 10 percent, while wheat exports are forecast to fall 11 percent.
CWB’s numbers are bigger than the USDA’s, with 27.2 million tonnes of corn and 10.5 million tonnes of wheat.
Last year’s growing conditions were ideal. This year there was good moisture at seeding time. How the rest of the year unfolds is anybody’s guess.
“Even (Russian president Vladimir) Putin can’t change the weather, or at least we don’t think he can,” said Burnett.
