Declining funding and reluctance in replacing Soviet era rolling stock and infrastructure has threatened to derail burgeoning Russian wheat exports. In a similar scenario to Australia’s last harvest where supply lines didn't cope with strong demand and reduced rolling stock exacerbate the issue. The Russian national rail company is stating that it has banned rail movement to the main port of Novorossiysk, after a backlog of more than 3,500 railway cars clogged lines in the north.
There are reports surfacing in Novorossiysk, which has a capacity of around 1.4mmt a month, exporters have placed orders to deliver 500-600 railway cars a day, which is double the amount the port could handle. Even if the railway delivers all the contracted grain, the ports will be working at the limit of their capacity, with a large carryover for October expected.
Exports are forecast to surge as buyers shun traditional and more expensive exporting countries and scramble for the world's cheapest grain. After last years drought ravaged crop of 61mmt, this year is forecast to hit 61mmt, with these ample supplies dominating global wheat sales of late (especially the price sensitive buyers). After the first two months of the marketing year Russia has exported 5.8mmt of grain (2.6mmt July and 3.2mmt August). With the Russian Grain Union forecasting that total exports could hit 25mmt, up steadily from the previous records of 18.5mmt set in 2008 and 2009.
Given the unreliability of the country as a reliable exporter and in lieu of the recent grain ban, the current logistical nightmare will cause domestic basis to move higher and make customers source grain from other ports or even other countries. Since Black Sea grain has been the key bearish factor weighing on international markets, any rise in Russian prices could have a sharp knock-on effect on world grain prices.
Russian origin FOB prices are slowly creeping up in value, looking at previous GASC (Egypt state grain buyer) tender results. Values have increased by $30/t over the last month, exceeding the $18/t move in CBOT DEC futures over the same time.
In contrast Ukraine ports are resemble a ghost town, as government red tape is stifling exports. Although Ukraine has forecast a bumper crop of 51mmt of which 21mmt is wheat, little is being exported due to red tape and export levies making prices as much as $30/t over neighbouring Russian origin. The export duties on wheat is at 9%, whilst barley is slugged 14%.
Originally Ukraine forecast exports between 20 -25mmt, but so far in July and August, wheat and barley export have slumped to 1.8mmt (-22% then in 2010), with the bulk of wheat exports feed due to rain downgrading as much as 60% of the wheat crop. Up to 1mmt of barley has been exported mainly to the Sauid market. The levies are expected to stay until at least Christmas. So when these levies eventually go up in smoke, expect Ukraine wheat to be aggressively priced into world markets at a time when Australian new crop hits the world market.