As farmers in the Ukraine enter the planting season for corn and wheat, limited financing, a devalued currency and growing unrest have made buyers cautious about Ukrainian grains. In recent months, the expected prices of both corn and wheat have increased significantly reflecting risk in the market.
Concerns over Next Year’s Crop
Planting conditions for corn and wheat are favorable in the Ukraine, as heavy rains followed by dry conditions have led to good soil moisture. However, financing has become an issue for many Ukrainian farmers as rejections and high interest rates are making it difficult for them to purchase needed materials.
If farmers use fewer fertilizers, chemicals, lower quality seed or simply plant less on their land, there could be notable effects on yield. There is also speculation that many farmers will switch land that was originally intended for corn to barley, or leave the land fallow and wait for winter wheat planting. Both barley and winter wheat have considerably lower input costs.
“Those two possibilities, along with the reduction in inputs at the same levels we’ve seen in the past, [mean that] we’re definitely going to see a reduced corn crop from the Ukraine this coming year,” said Cary Sifferath, U.S. Grains Council regional director for the Middle East & Africa.
Exports Thwarted by Poor Quality and a Devalued Currency
Ukrainian exports have slowed in the last month, a result of quality issues and political turmoil. According to Sifferath, several buyers in the region who received shipments of Ukrainian grain early in the year were not happy with the quality. The issue, he says, is lack of enough proper drying and storage facilities for grain, especially corn.
“While there’s plenty of new storage being built in the Ukraine, there [are] still a lot of less-than-ideal storage and drying facilities,” he said. “So, they tend to have more grain quality problems, especially as we get further along in the crop year.”
With the conflicts and subsequent shutdown of Crimea, many worried about potential bottlenecks in corn exporting from the country. However, Crimean ports don’t ship much corn, Sifferath said, meaning most corn ports remain open and operational. Even so, concerns about war have increased risk premiums for traders and ship owners, leading to higher freight and shipping costs.
The possibility of war has also caused the Ukrainian hryvnia, the local currency, to depreciate significantly, making farmers sit on their valuable grains while waiting for the right price.
“Because of the on-going conflict, the currency has devalued maybe 30 [to] 35 percent versus the dollar,” Sifferath noted. “If I’m a farmer and I have corn or wheat in my storage bin on my farm, that grain is just as valuable as U.S. dollars to the world market. So, I may be better off holding the grain than selling it in local currency.”
Price Futures Spike as Buyers Remain Reluctant
All of these turbulent conditions in the Ukraine have caused spikes in corn and wheat futures. In May, the Chicago Board of Trade corn futures hit a peak, the highest since September and up 11 percent compared to last year. Similarly, wheat futures increased nearly five percent in May, the largest jump in price since September 2012.
As many buyers wait out the uncertainty in the Ukraine, prices continue to rise as farmers hold on to their grain, causing next year’s yield forecasts to take a hit. Conditions remain turbulent as violence escalates in Eastern Ukraine and major cities like Odessa, which could further hurt crop yields as farmers who are in the Army Reserve are mobilized.