Fueled by record harvests, Russia and Ukraine are expected to surge to the top ranks of the global export markets for wheat and corn in the coming years, a development that will open up new investment opportunities in commodities and equities. 

The surge in Russia, which will see its exports of wheat explode to more than 20 million metric tons this year from four million in the 2010-2011 year, is powered by robust production and inventory, rising global demand and lower domestic prices. Meanwhile, Ukraine will jump into the top ranks of corn exporters thanks to favorable climate changes, rising demand and higher prices. A weaker U.S. harvest is also expected to help.

“We’ll split the export markets between us a bit as Russia will sell more wheat, while for Ukraine, it’ll be barley and corn,” said Volodymyr Lapa, the general director of the Ukrainian Agrarian Business Club, the nation’s leading agricultural lobbyist.

“In the midterm perspective, the share of Ukraine, Russia and Kazakhstan in seven to 10 years will grow to 30% to 35 % of global wheat exports,” as compared with 12% to 17 % currently, he said.

The resurgence of Russia and Ukraine is expected to have a significant medium-term impact on the dynamics of the world’s grain markets, including the launch next month of a futures contract for Black Sea wheat. It could also help drive investment to Russian and Ukrainian agriculture-related equities and trigger a round of IPOs in the sector.
Russia takes the wheat market

Russia’s agricultural sector has rebounded from a disastrous 2010/11 grain-growing season, ruined by drought, and will export a record 20.5 million metric tons of wheat in the 2011/12 year after only 4.0 million in 2010/11, according to the Institute for Agricultural Market Studies. This would return Russia to its 2009/10 rank as the world’s second-biggest wheat exporter behind the U.S. Officials projected total wheat production at 56 million metric tons, a strong year, but not a record.

Competition will be harsher in the 2012/13 season, with wheat prices expected to suffer from increases in U.S. and EU production that are projected to produce the third largest harvest in history.

Global wheat inventory is already at record levels. Yet the Russians say they are confident they will surpass their recent record with exports of 22 million to 25 million metric tons in 2012/13 and remain competitive, even amid a potential supply glut.

“We are capable of offering the global market less expensive wheat than competitors,” said Arkady Zlochevsky, president of the Russian Grain Union, adding that he expected demand to grow.

“Many countries, even the U.S., have begun using wheat rations as feed, which will boost demand,” he said.

Also working to the advantage of Russian wheat producers is a Ukrainian government that routinely restricts wheat exports. Keeping domestic bread prices low is among several reasons for the policy.

“We essentially gave all our export markets to the Russian Federation and we’re seeing that this isn’t stopping,” said Lapa of the Ukrainian Agrarian Business Club.

Ukraine exported 23% of its wheat in 2011/12, compared with 44% in 2009/10, before the export quotas were imposed.

As for the 2012/13 marketing year, Russia has suffered far less damage to its winter wheat crop than Ukraine did, which should allow it to maintain its surge in production and exports, Zlochevsky said.

Meanwhile, in Ukraine, a severe winter has set pessimistic projections of only a 10th of Russia’s anticipated 2012/13 wheat production, or between 8 million to 14 million metric tons, according to the Ministry of Agrarian Policy of Ukraine. Exports will be close to zero with 10 million to 11 million metric tons needed for domestic consumption, Lapa said.

Even so, the Russia, Ukraine and Kazakhstan troika is projected by some studies to capture as much as 50% of the wheat export market by the decade’s end, Lapa said.
Ukraine’s corn exports pop

Corn has overtaken wheat as Ukraine’s chief export crop in the two most recent marketing years, an unprecedented development that is expect to persist for the next several harvests. Ukrainian producers and exports have been riding a global tide, experts said.

“This isn’t the first time in the history of the global grain market that corn will be more expensive than wheat,” Zlochevsky said. “But never in the grain market’s history of fluctuations have we observed two consecutive seasons in which corn remained higher than wheat, which in theory works as a very strong stimulus in growing corn.”

Ukrainian production reached a record 21 million metric tons in 2011/12, nearly doubling the prior season’s harvest, according to USDA figures. About 15 million metric tons in 2011/12 exports dwarfed those of previous years.

With its record-setting year, Ukraine joined the world’s top-five corn producers and top-three exporters, behind the U.S. and alongside Argentina at 14.0 million metric tons.

For 2012/13, Ukraine will be aiming to overtake India with 24.5 million to 25 million metric tons of production and overtake Argentina as the second-ranking exporter at 18.2 million, about a 30% increase from this season, as estimated by Maria Kolesnyk, chief analyst at the Agriculture Analytical Agency in Kyiv.

“Don’t expect high prices for corn next season, though it’s not worth talking about a collapse in prices either since demand is quite high,” she said. “Livestock farming is developing in the world and there’s a certain demand from Asia, therefore prices will be stable more-or-less, which a slight trend towards declining.”

Kolesnyk estimated that Ukrainian farmers will still make a handsome profit even if corn prices slide $25 to $37.50 per metric ton.
Futures and equities

As Russia powers ahead in the wheat market, the CME will begin trading Black Sea Wheat futures on June 6, creating the first futures contract for a commodity from the region. The wheat will be delivered to ports in Ukraine, Russia and Romania.

“We’ll get a very valuable indicator for grain producers and traders without having to turn to formulas and similar things,” said Volodymyr Klymenko, president of the Ukrainian Grain Association.

The Black Sea Wheat contract won’t initially affect prices because it will take time for the market to develop trust, said Arlan Suderman, a market analyst at Farm Futures.

“Eventually it will provide greater transparency to the volume of available grain in the region and its market value,” he wrote in an email.

Another investing avenue lies in equities. Local investment banks have “buy” recommendations on Russia and Ukrainian agricultural stocks, advising investors to consider long-term plays, particularly on issues that are undervalued when compared with their peers.

These include Russian meat producer Cherkizovo and Ukrainian poultry producer MHP, which has a corn-growing segment for feed.

“Russia and Ukraine are among the few countries in the world where investment in agriculture is possible,” said Konstantin Fastovets, an agriculture analyst with Renaissance Capital in Kyiv, Ukraine.

Among the agricultural companies reported to be planning IPOs are the Agropolis Group of Companies and Loture-Agro in Ukraine, whose offering had been planned for the second quarter.

By Zenon Zawada for MarketWatch