Ukraine's grain exports are restricted, and grain stocks have reached a record high
Ukraine's grain exports have sharply declined, and grain stocks have reached an all-time high. The restricted logistics is squeezing farmers' incomes.
The exit channels were blocked, and the trends of oil and grain futures diverged.
Ukraine is a major global exporter of grains. Due to the impact of the war, most of its ports were blocked, and it could only rely on the limited-capacity ports of the Danube River and the railways passing through Eastern Europe to ship out its goods. The port blockage has halved its export capacity. In September, the volume of grain exports dropped by 60%. The prices of grain futures fluctuated sharply. The market quickly realized that this shortage was caused by logistics bottlenecks. The actual production decline was not that big. The prices quickly dropped after a brief surge.
The Ukrainian Ministry of Agriculture prefers to prioritize the export of high-value-added goods. Oil-bearing crops and processed products receive transportation priority. The futures contracts of oil products performed relatively strongly. In contrast, the futures contracts of grains appeared more weak. Why should oil and grains be treated differently? UAC stated that oil-bearing crops have an export advantage because their prices are higher and can withstand the high logistics costs.
Grains are different. The proportion of logistics costs in the final price of grains is much higher. When the exit channels are tight, grains, which already suffer from logistics disadvantages, will be even worse off if oil-bearing crops take away their transportation capacity. Under the current circumstances, it is unacceptable to offer additional preferential policies to oil-bearing crops. UAC warned that grain farmers will suffer first - their stocks can not be sold, and their income will be sharply reduced.
The grain stockpile has reached an all-time high.
According to data from the Ministry of Agriculture, as of September, Ukraine's grain export volume has decreased by more than 60%. The export of oilseed crops and edible oil has also decreased by one-third. As of September 1st, Ukraine's grain stockpile was 10 million tons higher than that of the same period last year, reaching 24.6 million tons. Unable to be transported to the east or west, they can only be piled up in warehouses. Warehouses and grain silos are beginning to be in short supply.
Over the past two months, the price of ground wheat paid by Ukraine to producers has dropped by nearly 30%. Grain can not be sold at good prices, and farmers' income is visibly shrinking. With limited storage facilities and narrowed procurement channels, prices are still falling.
For the futures market, the inventory pressure in Ukraine is a clear signal. In the short term, the inability of Ukraine to transport its grain will increase global concerns about the supply of wheat and corn. Once transportation capacity is restored, it will put pressure on prices. Last year Ukraine's wheat stock is only at 16 million tons, but could reach a record 11.7 million tons at the start of the 2027/28 fiscal year, APK-Inform said last year. Corn stocks also could grow to 9.2 million tons from 5.7 million tons.
Farmers' income has sharply declined, and the demand for futures hedging has risen.
Ukraine can only rely on low-capacity ports and railways for exports now. The proportion of logistics costs in the final price of grains has increased. This has led to a serious disconnection between the spot prices at the source and the futures market prices. Futures arbitrage funds have keenly seized this opportunity. A large amount of spot goods have been locked in warehouses and can not be delivered.
The blocked exports and policy bias have caused a sharp drop in the purchase prices of grains. Farmers face a serious risk of income reduction. To lock in profits, farmers' willingness to participate in the futures market for hedging has soared unprecedentedly. The selling pressure in the spot market is transmitted to the futures market through hedging channels. The decline in futures prices, in turn, suppresses the willingness of the spot market to purchase.
Institutional forecasts predict that in the early stage of the next year, the inventories of wheat and corn will soar. This expectation of extremely abundant future supply has sealed off the space for a significant rebound in the futures market. The market needs to wait until the actual export channels are completely opened before re-evaluating the balance of supply and demand.