High new crop prices push Ukraine farmers to sales

Ukrainian farmers are willing to sell larger volumes of new crop grain and oilseeds as forward prices for the 2021-22 marketing year have reached record highs. But traders remain cautious after a wave of defaults on forward sales from farmers this season.

A sharp increase in world agricultural prices in the 2020-21 marketing year have lifted forward grain and oilseed prices for the new season starting 1 July, with prices standing at multi-year highs. And this is driving Ukrainian farmers to increase forward sales of the new crop, allowing them to lock in attractive production margins.

Indicative cpt prices for the 11.5pc protein grade Ukrainian wheat for July delivery have been heard at about $230/t, down by 18pc from the current prices for old crop, but up by 35pc from the five-year average for forward prices around this time of year. And these price levels should allow farmers to secure wheat production margins above 50pc providing that 2021-22 yields are in line with last year's average level.

Similar margins could be fixed for winter barley, with current forward prices for new crop at $230-240/t cpt, 45pc higher than a year earlier.

Meanwhile, forward prices for 2021-22 rapeseed crop sit at around $505/t cpt, compared with $415/t last year, leaving rapeseed as potentially one of the most profitable winter crops in Ukraine ahead of the start of the new marketing season, with an estimated average cost of production standing at just $320/t, excluding value added tax.

As for spring crops, sunflower seed remains the leader in terms of potential profitability, as current forward prices are hovering around $510-520/t cpt, up by 30pc year on year, leaving farmers with a 67pc margin.

And with current corn forward prices standing at $210/t cpt for October delivery, Ukraine's farmers can hedge a 50pc production margin, providing that 2021-22 yields are at least in line with last year's average, which stood at 5.6t/hectare (ha). But if yields return to a long-term norm of about 7t/ha, farmers could receive more than an 85pc return on production when selling corn at current forward prices.

Traders reluctant to commit to forward purchases

But while producers are ready to sell more volumes of new crop on forward terms compared with previous years, traders are limiting forward purchases.

The continuing 2020-21 marketing year has shown that many Ukrainian producers were not ready for the high price volatility seen, with traders having faced a wave of defaults on forward sales from producers, who refused to deliver goods after prices had sharply increased.

As a result, forward purchases of the new crop by Ukrainian traders are unlikely to exceed 7mn-8mn t for wheat and 9mn-10mn t for corn. These volumes could cover export shipments over the first three months of the new season, if export volumes are in line with the 2020/21 marketing year.

This could force producers to continue selling new crop supplies on the spot market without hedging strategies, or to explore the use of derivatives instruments, such as exchange futures and options.

By Alexey Yeromin