Russia Status as World Wheat-Export King Eroded by Oil Windfall

(Bloomberg) -- Russia took decades to turn itself into the world’s biggest wheat exporter. A year later and it’s already set to relinquish its crown.

Surging oil prices that have helped revive the country’s energy-rich economy also drove the ruble up about 40 percent from last year’s lows. That’s made Russia less competitive on wheat sales abroad, where it had surpassed the U.S. as the world’s largest supplier.

During the past decade, Russia has emerged as a dominant force in grain markets with bumper crops and rising global demand. A big part of the sales growth was fueled by years of weakness in the ruble, which created a pricing advantage in grain transactions done primarily in dollars.

“The ruble is currently the biggest impediment to Russian exports," said Alexandre Andrey, an analyst at BMI Research. “A more favorable exchange rate is required to see exports pick up."

With the ruble recovery boosting dollar costs for Russian wheat, Moscow-based consultant SovEcon has repeatedly cut its export estimates. The latest on Feb. 21, its steepest this season, would see Russia already giving up its ranking as the biggest exporter.

OOO Mirogroup Resources, a top Russian grain trader, stopped buying from farmers after the most recent currency appreciation in February. The ruble prices still demanded by growers mean the company is unable to earn a profit selling in dollars overseas, according to Director General Andrey Doluda.

Export Losses

"There’s just one option, to buy at lower prices; then we run into persistent resistance by growers who aren’t ready for this," Doluda said in an interview. "I wouldn’t say a strong ruble is halting Russian grain exports, but it makes it considerably harder. Perhaps the export flow will subside for a while."

Even an 18 percent gain in dollar prices for Russian wheat from a low in July to $191 a metric ton isn’t able to counter the effect of the stronger ruble.

While farm-gate prices averaged 9,100 rubles ($158) a ton in European parts of Russia by Feb. 10, according to SovEcon, costs for transporting grain to ports and loading it on ships have to be added to that figure. Including those, Mirogroup’s export revenue ends up 2 percent to 3 percent lower than its expenses, Doluda said.

Russian farmers would rather hold onto grain than sell at lower prices as they hope for a rebound. Unlike past years, fewer have debts they need to finance immediately with export revenue, while some have added storage capacity.

Record High

“Many farmers, I won’t say it’s an overwhelming number, are restraining sales as they calculate how the price may change,” said Russian Grain Union Vice President Alexander Korbut. “Everybody wants an increase."

In its latest downgrade, SovEcon cut its estimate for exports for the season ending in June about 5 percent to 26.6 million tons, bringing shipments to “just slightly” above the prior period. The consultant, which earlier forecast as much as 30 million tons, blamed the drop on the ruble’s appreciation. The U.S. Department of Agriculture still sees Russian exports of 28.5 million tons.

Both estimates would still be all-time highs. Accelerating sales to Egypt, the biggest buyer, and cuts in estimates of global stocks by the USDA are helping. Egypt bought 300,000 tons of Russian wheat, or five of the total of six cargoes, in a tender last week. The price paid by Russia’s top customer was the highest since November 2015.

Farmers may also seek to speed up sales in the coming months as the prospect of another huge crop following 2016’s record harvest strains their ability to store the grain, Korbut said. It’s a “colossal risk” to hold inventory, given the threat of pests, he said.

At the same time, competition from the U.S. and Australia may put downward pressure on prices, making Russian growers even more reluctant to sell. Pricesin Chicago fell to a 10-year low in August on forecasts for record global harvests.

The USDA has raised its estimate for U.S. exports several times this season, taking it to 27.5 million tons by February from an initial 24 million tons. Australian growers reaped more than previously predicted on better yields, boosting output to a record, the Australian Bureau of Agricultural & Resource Economics & Sciences said Feb. 13.