Russian Wheat Optimism Is Fading as Heat Shrinks Bumper Crop

(Bloomberg) -- Wheat farmers in Russia, the world’s top shipper, have started the new season a lot less optimistic than they were just a few months ago.

Heat and dryness have curbed the crop’s potential, prompting analysts to keep downgrading their outlook for the harvest and exports. As well as hurting yields, the weather has improved crop quality to the point where it’s harder to sell, and the nation’s exports are off to a slower start.

While Russia is still set to collect its second-biggest crop and nobody expects it to lose its title as the No. 1 exporter, it’s facing more competition from rival shippers, particularly in the Black Sea. For example, more favorable weather in Ukraine has put the nation on course for a record wheat crop, and a good harvest in Romania is helping take market share from Russia.

Russian Wheat Optimism Is Fading as Heat Shrinks Bumper Crop

“Numbers have been coming down recently, more so for Russia than Ukraine,” said Amy Reynolds, senior economist at the International Grains Council in London. “There is the potential for further downgrades as the harvest advances and more reports of results come in, but crop prospects still look pretty good at this stage.”

Consultant SovEcon this week cut its Russian crop estimate by 3.8% to 73.7 million tons on low soil moisture and lower-than-expected yields in major growing areas. The forecast is below that of the U.S. government and Russia’s Agriculture Ministry, which used to be among the most pessimistic outlooks.

Here’s how this season is shaping up for Black Sea producers:

Russia’s Mixed Crop

With heat hurting yields, the U.S. government this month lowered its Russian output estimate by 4.9% to 74.2 million tons. Farmers are also harvesting unusually high-quality wheat after warm weather boosted protein levels. That’s bad news for exports because growers will seek higher prices, making Russian grain less attractive on the world market.

“Higher quality is causing the farmer to wait it out for a higher price,” said Matt Ammermann, a commodity risk manager for the Black Sea region at INTL FCStone. “Right now there remains no reason to discount the quality wheat.”

Russian Exports

The season is only weeks old, but exports slipped 40% from a year earlier by mid-July. Russian grain has also lost its allure in Egypt, a market it has dominated for years, being snubbed in some tenders for this season.

The ruble’s advance to near a one-year high has further made Russian supplies less appealing for overseas buyers, said Andrey Sizov Jr., managing director at consultant SovEcon. There’s less spare wheat to ship out too after inventories fell to a three-year low.

Still, there are signs exports are starting to pick up. Shipments in the second week of the season doubled from a week earlier, government data show. The pace may accelerate in the next two months as harvesting progresses, Ammermann said.

Russian Wheat Optimism Is Fading as Heat Shrinks Bumper Crop

Black Sea Rivals

Ukraine is expected to harvest a record wheat crop even after drought hurt plants in some areas last month, and researcher UkrAgroConsult said yields are up as much as 12% from a year earlier. But supplies are also of a higher quality than usual, which may slow sales.

Romania on the other hand is off to a flyer this season. Thanks to a good crop outlook and attractive prices, the country has sold more wheat in Egyptian tenders so far than Russia and Ukraine combined, and is by far the European Union’s top exporter since the start of July.

©2019 Bloomberg L.P.

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