Russia's unofficial wheat export floor price sows confusion among trade

14 Jun 2023 | Masha Belikova

An update to an unofficial minimum price cap on Russian wheat exports is causing confusion among traders across the sector, as there is no clear understanding of whether it exists, how it works or is regulated, or what the consequences are for breaking the rule, trade sources have told Agricensus.

The collapse in wheat prices in recent months has created a headache for the Russian goverment, which has been hit by economic sanctions in the wake of its invasion of Ukraine. 

However, wheat is excluded from sanctions and the country's treasury had hoped to see coffers boosted by good export returns from a huge wheat crop estimated at over 100 million mt. 

With the opening of the grain export corridor in late July, and with Russia and Australia boasting record breaking harvests, many of the supply fears that had underpinned higher prices have been eroded.

That prompted the Russian government to attempt to impose a floor on export prices which was thought to have been set roughly in line with the cost of production, at around $275/mt. 

The informal launch was accompanied by an uptick in rhetoric, but world prices have continued to slide forcing Russian exporters to have to discount as orders showed signs of slowing.  

Last week, trade sources told Agricensus that the Russian government had unofficially updated the level to $240/mt on a FOB NTT basis, and expectations surfaced that any exporters selling below this level could face issues - with the potential withdrawal of phytosanitary certificates thought to be one of the most likely punishments.

But, a lack of any official statement or explanation means market participants have been left to guess what the consequences could be - with difficulties securing phytosanitary documentation one method used in the past as an unofficial mechanism to delay exports.

Trade indications and offer levels received by Agricensus suggest a large proportion of the companies that are marketing Russian wheat have been following the new policy, with most offer levels heard at around $240/mt.

However, there have still been a few sellers heard offering below the set level - with some as low as $230-235/mt FOB NNTK.

"It doesn't work at all," one broker told Agricensus of the concept of the floor price.

"The person that needs to sell - sells... somebody [who] does not need to sell urgently waits for the market to catch up with the minimum [price]. Also, those who know how will sell on a CFR basis, meaning the price sold is always above the minimum," the source said.

The lack of precision around the level of any floor price has also highlighted the confusion over whether any floor price is levied on an FOB or CFR basis - or what basis load ports could be included in the price, although one consequence of the confusion is a marked increase in Russian exporters started to show offers a delivered basis, trade sources said.

A recent tender from Egypt's state-owned importing agency General Authority for Supply Commodities (GASC) has also highlighted some of the issues faced, with some deals - expected to be sourced from Russia - booked at levels of under $229/mt FOB, or around $244.50/mt CFR delivered.

That prompted industry lobby group the Russian Union of Grain Exporters to issue a statement to Russian media group Interfax, blaming "international traders" that "did not represent the interests of Russian exporters" and stating that the group "did not understand the reasons for their pricing."

With pressure still on wheat prices, as Europe heads towards its harvest season, and only hand-to-mouth demand in evidence, trade sources spoken to by Agricensus expect the unofficial $240/mt floor to be broken, as already happened to the previous $275/mt level, set back in late March.  

"They will need to export almost 50 million mt. You do not do that with a floor price," a second broker said.

Russia harvested its biggest ever wheat crop in the 2022/23 marketing year, estimated at 104.5 million mt and, even though exports so far have already shown record levels, it still means Russia is facing huge ending stocks for the next marketing year.

At the same time, early estimates for the 2023/24 crop have come in at decent levels - with most analysts expecting production in the range of 78-85 million mt.

Taken together with the record stocks, the country is likely to need to smash export records again in 2023/24.

At the same time, wheat prices have been on a steady decline since June 2022, with a further sharp drop recorded over the last two months as current levels are already being indicated at levels last seen back in September 2020.

The Agricensus APM-3 assessment for Russian wheat was assessed at $226.50/mt on Wednesday, down from a peak of $430/mt in the aftermath of the Russian invasion of Ukraine in early March 2022.

This is also only $37/mt above the lowest level seen for wheat - back in September 2019, when it was indicated at around $184-185/mt FOB.