Russian farmers facing war, export taxes and the impact on global wheat trade - Andrey Sizov

[Yeager] Hi everybody. I'm Paul Yeager. This is the MToM podcast production of Iowa PBS and the Market to Market TV show. We're talking to a friend of the show that we've had on a couple of times. It's Andrey Sizov. He is based in Europe. He gives us a great perspective of Russia and Ukraine, and a lot to do with the wheat market. We had this conversation just a couple of weeks ago, right after USDA report, so early February, early to mid February. So if a couple of things have changed. Just be warned. That's when we recorded it. But we know a couple of things probably aren't going to change. And that is the ongoing war between Russia and Ukraine and the United States and China and having the discussions there. So, Andrey, why we talk to him is, he is the publisher. Any he watches a lot about the Black Sea focuses very heavily on wheat. He has a report that comes out. It's market research. It's the seas off report. And, so we always like to kind of get his take on what's happening, what has changed. We're going to kind of jump around the globe a little bit. We will talk about India and Pakistan just briefly at the end. We'll also get into Brazil. We don't get into Argentina on this one, but we will talk about China and the US, as well as some European issues that are going on with Russia and Ukraine. So that's what's ahead in this installment of the podcast. New episodes come out each and every Tuesday. Now let's get to Andrey. Andrey, good to see you again. For those that might not be familiar, we've talked a couple of times before. What do you do?

[Sizov] I run a company called SovEcon, and we issue a service, a report called Sizov Report. The report card was our main focus is wheat and Black Sea, specifically because we know a lot about this region. I'm originally from Russia, originally from that region. We have a lot of people on the ground in that region and connections all over the region. And we know and people who trade grain and wheat specifically knows that it could be pretty important often for global clean markets. So we look at this region and help people to understand what's happening here. Could it drive Chicago limits up or limit down because of some developments on the ground here.

[Yeager] Your position or your geographic location? You don't sound like you're in Tennessee. You're not in North America. But you talk about Chicago like you pay attention to it. Why do you pay attention to Chicago in Europe?

[Sizov] So because that's still a major benchmark for a majority of agricultural commodities, which include it, of course. So there are a lot of questions about, how it works and how actual how is the really good benchmarks for physical market for actual fundamentals, but it's still the most liquid contract if you talk about, Chicago with CBOT wheat. And that's why we have to follow it closely. So it's number one ticker on my screens at Chicago wheat and MATIF, which you guys and you as follow to let us extend. But it's also pretty important, especially for the Black Sea, which is often traded versus massive and then Kansas wheat. A lot of people say that Kansas with this kind of last, stimulative, contract. But again, Chicago is the most liquid one. So that's why we have to follow it closely. And we do know that it does react often and sometimes very, rapidly and very strong to developments here in Europe or in the Black Sea.

[Yeager] But to me, that's very interesting that all of you follow Chicago, but the wheat market is much more in recent times, dependent on, dependent on what happens in your area.

[Sizov] Yeah, that's a very good point. And I so that's a good question I agree. So for example, in my view, hypothetically, Matif wheat, which is traded in Paris, should be a better benchmark because whole Europe is traded to versus Matif whole Black Sea's trade versus Matif. First of all. But the problem with Matif, it's not as liquid as Chicago. So I don't need for example, in recent months we saw, for example, Chicago, windy down because of stronger dollar which actually should support, Paris because of weaker euro at the same time. But in reality the Paris was Matif which was following Chicago, which doesn't make sense fundamentally, but this is how it has been working in recent months. And that strange. Yeah I agree. And actually if I wear a Euronext is that exchange which trades, my TIF, probably I should invest more efforts to make it more liquid to improve liquidity, improve options. But they don't do that. And that's why CBOT remains the number one benchmark, despite the fact that us, the U.S, is very far from being an exporter, number one at the moment.

[Yeager] Which and hasn't been for years and years.

[Sizov] Yeah. Okay. Now just to give you an idea. So real token metric tons. But Russia probably would estimate would export around 42 million tons of wheat this season and some of the highest number, which is more than 50% higher than than the U.S. Then you have Ukraine, then you have the EU. And combined they exports roughly three times at least the U.S but despite that, Chicago is still number one benchmark for which market globally.

[Yeager] All right. So the benchmark Chicago got it. All right. But it's still watching your region. Let's watch. Let's talk about your region then. Let's start with Black Sea. What's the what's the latest on. Let's just start scope of influence and Russia versus Ukraine. Are those still the biggest two storylines out of that area.

[Sizov] If we so let's just say a few words, as you suggested, about Russia and Ukraine importance for grain markets. So for wheat, it's, Russia is still by far the number one exporter of wheat and has been like that for several years already. Russia and Ukraine experts combined around 60 million tons of wheat go here this season. That would be evidence for this season. And that's roughly one third of total wheat experts. And so that's the biggest wheat exporting hub by far in the world. If we talk about corn, Russia's ships, negligible volumes, a few millions this year. Ukraine is a big supply, but it's still typically number four after U.S, Brazil, Argentina. And then comes, Ukraine. So but it's very important for wheat and still relatively important for, global, corn markets especially take into account that Ukraine has been used to be the number one supply of corn to China. And we all know how important China is for the US experts, corn experts. Right now we want to talk about recent developments. Let's talk about recent developments or just what you talk about.

[Yeager] I do have a question. Let's go. Ukraine specifically, a couple of weeks ago on the TV show, Ted Seifried said that what he's hearing about Ukraine is that they're not planning as many acres. And if the war would end, if there would be some end, they might go back to increasing acres just in general, not just wheat, but everything. Are you hearing that there's less acres still not in production here in the last 3 to 4 years, then historic, for whatever reason. And what is that reason?

[Sizov] Yes. So, there's obviously a substantial decline in, in acreage in Ukraine for all crops after the start of the war, which now we're talking well almost start in February 2022. So it's almost three years ago. But and Russia captured around 20% of Ukrainian territory, including some agricultural regions, in South, eastern part of the country. But, so because of that, that plant less because they control less territory. But at the same time, if you look at, plant in, our region, ‘22, ‘23, ‘24, ‘20 and estimates for ‘25, so it's not a decline, I think actually is a, if we talk about winter wheat, for example, because it has been planted for the next season already, it's basically unchanged year on year. We see some decline in corn and really, for example, but is being offset by bigger, area under oilseeds because of higher margins. But, you know, it's relatively stable. So it was a huge decline, huge drop after 2022 because of the start of the war. But I have to say this has been relatively flat, and we see some changes because of just different margins for different crops. For Russia and for Ukraine typically, you know, you know, for us it's for the U.S it's kind of that, correlation relation between corn and beans. But I think for Russia and Ukraine, for Russia, it's sunflower seed versus wheat. And for Ukraine it could be sunflower seeds versus wheat, versus corn. So there are some adjustment. More corn, less oil seeds or more oil seeds, less corn. I think we'll see that next, season. But if you look at total acreage, it's more or less flat.

[Yeager] Okay. So it's a shifting in the total acreage. So what is from that initial drop three years ago of the acres not being planted. What's sitting there?

[Sizov] That territory, it's currently, currently under Russian control. As I said, it's around 20% of Ukraine total territory. So it's mainly Donetsk, Lugansk, those regions, in, in south eastern Ukraine. They still produce some crops there. And actually it's quite an interesting part of global supply and demand balance is the biggest one. It's not obviously Brazil or, or you ask for Russian wheat production, things like that. But it's still, an important variable, I think, for global supply and demand balance because it's on the radar of almost everyone because we know. So grain being produced in on that territory, that grain is not being reflected in any Ukrainian supply demand balance should be not controlled by Ukraine. And it's at the same time it's not properly reflected in Russian supply and demand balance sheet because, you know, it's kind of it's not politically, no one says that it's Russia. And even in Russian statistics, the, the typical is it don't reflect those numbers or sometimes they do reflect but kinda they're selling his production kind of old Russia. And his production in Russian is called New Regions. And here is the production in New Regions. But majority of those don't reflect those numbers in Russian crop numbers as well. So there's probably around 4 to 6 million tons of production. And part of that being exported, which is not to reflect anywhere. So the strength in numbers, it's not just reflected in Russian numbers, but still some volume, which being produced that.

[Yeager] Yeah. The part. Okay. That's what I wanted you to say out loud because that's the way it sounded, is that. Yeah. Russia is hard to know exactly what's going on. It's a little bit like China. We don't we know things are happening there. We just don't know exact numbers. Like what we know in the United States, what we know in Canada and Mexico, to an extent on the world stage. And so you're just making sure that's still what's going on.

[Sizov] Yeah, yeah, yeah, man. That's is that's what we do. And that's why we are not doing so bad. I mean, our business because we have a good understanding what's happening here on the ground. So what is it? What does a crop look like, what exports look like. And if you've been talking about recent developments, I think that's a substantial story because we just yesterday we had the WASDE report from the USDA. And again they keep overestimating Russian exports. And if there are too high in our they're a very high sales. That number two three melons above the reasonable volume well above our estimates. If there was a gap in wheat supply this season, that gap should be filled by other supplies. Is that good? That is that could be Australia and that could be us. And I mean, and that could be, a big story for Chicago if we see high, US wheat tax splits and smaller carryout stocks for the US, which should help us with prices.

[Yeager] The Russian side of this story. Let's focus there for just a moment. Are they holding their grain to put onto the market for a higher price, or are they just kind of selling it to the theory is finding it to keep their war operations going? Is that accurate?

[Sizov] So as they keep in for higher price?.

[Yeager] Like a farmer in the United States holds their, their grain until they see the higher price, the the dam, whatever. Darn the whatever the prices they, they will hold until they get a higher price. Is Russia just putting that on the market? Basically, as soon as they take that grain in to have some type of steady income to fund their operations.

[Sizov] You mean, fund that duration? Just so, yeah, I think I get a question. So about how important grain exports for the government. How important for state revenue. Yes. Yeah. I get a question. Right. Yeah. Okay. So yeah, that's kind, I think that's a misconception because. Yes. See, is that Russia sells a lot of wheat at whatever price to fund the war. And it's very far from being accurate in our view. So just for just a few numbers, Russian oil and gas revenue, state revenue, budget revenue is more than $100 billion of export taxes. Texas for oil and gas, for grains and all crops. I think it's some one around $1 billion. So 1% compared to energy revenue. So it's not a big deal. And, I don't think that's really important story for a Russian government, let's put it that way. So, Sarah, if we talk about this in specifically because there are different dynamics than two years ago or three years ago, was it was not this story this season. So the problem is for Russian farmers. And that's a big problem. And it's not related to the war. It's related to the fact that in 2021, Russia introduced before the war, Russia introduced very strict expert taxes on majority of crops which have been produced there, including wheat, corn, barley, sunflower, almost all oil seeds. And that's why farmers margins have been collapsing in recent years in Russia. So farmers yes they do. They would prefer in many cases to store their crops for longer periods of time to sell it later, but they're able to use because of low margins and low financial reserves. They have to sell it faster than usual. And I think that was the case for this season, especially for the first half of the season, which started in July. Stuck about wheat and Russian farmers were selling, and a lot Russian exporters were selling a lot. And despite a substantially smaller crop, Russian, which exports are still it's pace is rapid high despite small supply because of very aggressive experts in the first half of the season. But the point is now this story is mostly over. Grain supplies are substantially down the size of the country. Prices, domestic prices are rising fast. And that's why we see a substantial slow down and Russian exports, for example, in February, Russian wheat exports are likely to decline around 50% year on year and not because of weak demand. Probably what we can demand is also part of the story. But I think the major reason is just small supply of signs inside the country.

[Yeager] And the reason for the smaller supply. You may have said it is because the crop wasn't as good.

[Sizov] Yeah, because the crop wasn't good. So basically, I think just again, to give you an idea, 2022, Russia had a great weather and harvested record high wheat crop, 102 million tons. Then a year later, 23, it was 92 million tons. Minus -10 million tons. Last year it was, and as -10 million tons, 82, 198. And for next year, we expect to see a further decline below eight. It won't be 70, probably, but below 80 million tons, compared to 100 million tons in 2022. The explanation is weather problems. But another explanation, which I mentioned briefly, that farmers are struggling, is they are not making money because of very export taxes. Just to give an idea how much taxes are put in, how much they're taken out of the farmer pockets. It's roughly around depend on the regions from 20 to 40% out of their total sales, not the entire not their profits, but sales. So it's very restrictive. And that's why farmers are not making a lot of money. And that's why one of the reasons why we see such a decline in production of wheat and actually other crops in Russia.

[Yeager] Is there anything that's going to change that, lowering of the export tax? Is that one way that it would help the Russian farmer? I mean, you can't, you know, the United States always talk about growing your way out of a problem. I mean, that's not that's not the whole issue. It sounds like the tax issue is really a major, major thing there.

[Sizov] Yeah, exactly. So for Ukraine, the major issue for Ukrainian farming industry obviously is the war. And actually we should observe it was way more resilience that might be expected at the start of the war. But for Russia it's not related to the war. It's related to the fact that, four years ago already, Russia started to introduce very restrictive acts, but Texas and the rest still in place, they have been somewhat slowed, but they're still in place. And of course, the Russian farm, my lord. And until there was a substantial until that lifted. And I don't think that's happening any time soon. It will, Russian crop production is likely to decline further. So probably if you dock a year or two, I wouldn't be surprised to say I don't rule out that there will be Sands. Attraction now is not, number one, wheat export.

[Yeager] Does that open the door? Is Russia going to have to import wheat?

[Sizov] No, not at this stage.

[Yeager] I didn't think so, but I just wanted to make sure I asked.

[Sizov] Yeah, but it's a valid question. I mean, if we look at, 30 or 40 years ago, Russian use Assad, the USSR was very popular among farmers around the world because it was the biggest grain import in the world. So can we get back to that? It's unlikely. During the next several years at least. But I mean, if not, they won't be changed. I told and it should be changed sooner or later. But if nothing is changed, I don't rule out. Then when? When there was a poor crop and in 5 or 10 years Russia could even put some, noticeable volumes of grain from other countries.

[Yeager] Does the Chicago Board of Trade know all this? Do you think the price is factored into wheat specifically? And has that spilled over into corn and soybeans, through the board.

[Sizov] Just, so, so we do watch, wheat market closely on a day to day basis. We can say that, so all the problems we have in Russia and the outlook for the next crop is not good. There are other problems with, with, crop, particularly in the U.S and because of the cold snap, you had to just, recent weeks. So the outlook for production in northern hemisphere is not great. We have problems, very likely in Russia because plans entered the winter in a very weak state. And at the same time, we feel that physical market, particularly in northern Africa, which is, is the biggest problem combined buyer of wheat. We see some recovery in demand there. And, I suspect that there was a change of sentiment in the market because, before I think 2025, the market will just sell and we'd all of we trolleys were sold, all spikes were sold. Just sell wheat and make money. That was the approach. But I think it changed. And right now, because of the problems I mentioned, this part of the story and sentiment is changing.  For example, I think last week, for example, just to illustrate that, idea last week, for example, U.S. wheat inspections were extremely weak and we could go wild. Chicago, we on the same day, we just ignored those, weak numbers. And it means change sentiment. So all the news in the past were there, which news? And now is, is a neutral or actually bullish, and, of course, a lot, we all depend what will happen in Russia and Ukraine and how successful, Trump administration would be in, their attempts to solve this conflict.

[Yeager] Right. And that's always one of those stories that we hear about. Well, we're going to end this. Well, it's not your war, but we've been involved in, in the United States with funding of things that there's not an appetite right now to put as much money there as there once was. And I'm sure everybody knows that around the world, they they can read the papers to.

[Sizov] Yeah, yeah, yeah. But so, if you look at outlook and I think we at the very beginning we spoke how important that region is for global grain trade and specifically the wheat market. I think actually one of the reasons, if we look at the second half of 2024, one of the reasons for wheat weakness was that the market was expecting, higher, Trump, Donald Trump odds and he was elected and the market was expecting that he would stop this war. And that would somehow help, production, experts in the region, which is bearish. And, for example, let us look at the markets right now. If I look at the Ukrainian debt, it's their bonds. They have been rolling since October. They say by around 50%, something like that. So it's a very strong rally. So for those of that that believe that Ukraine will be able to pay them back, and that's optimistic. And just yesterday, this night, an American citizen was freed by the Kremlin's special envoy, flew to Russia and expected to visit and flew back to the U.S. was an American citizen, and that's, really, is that really could be indicating that odds of truce, at least a truce or some agreement. Here they are. All right. But at the same time, I just want to say my point is kind of contrarian in this case. But at the same time, I think that has been any success. He has been already priced in almost the price to, at the same time, it's not it's very far from being guaranteed, despite the challenges that the new administration is investing and all of their efforts, I think it's not it's far from being guaranteed. So if there's no truce, if there's no peace agreement, we could see another wave of escalation. And that could be, quite bullish story. My for again, a for wheat, first of all.

[Yeager] It's not that I am looking for the contrarian opinion. I just appreciate it. It's always good to hear something different than what I hear on a day to day basis. So I appreciate that. Let's if we could, expand the reach just a tiny little bit to China. What type of look do you have? What goes on over there and how it influences your customers and clients? And how does it what do you see from where you're at? And China's, response to the United States, unlike what you were just talking about, Russia's response and Ukraine's response to the U.S and Trump.

[Sizov] So if we talk about the war in the Black Sea, China has been promoting it. It's had its own peace plan a long time ago, I think it was introduced and it was supported by Brazil. So China tries to be kind of representative of the global South, we can put it that way in this conflict. And China says this wants to. And they swore, they invest some efforts in to ended this war, for example. It was just interesting that they supported, Trump statements about the end of this war. Is that okay? We want to work with President Trump. We want to work with Russia in Ukraine to end this war. And, I don't think that China actually has been probably beneficiaries of some kind of this war, but it feels that now they really don't want it to continue, at least at this stage. I think they want a strong global economy. Gross. And obviously that war is one which is a problem for that, gross.

[Yeager] Okay. Do you see China? Can you give any perspective to the United States and China's relationship from where you're at? Not necessarily. You're an independent person, but you're removed from the two sides. And, are you seeing any thawing or freezing of relations between the two?

[Sizov] Yeah, obviously, President Trump was talking a lot about China and was a very important topic for him during his first term. And actually, I was a bit surprised that he was, so has that he spent so much time on terrorist. We have terrorist news almost every day. Coming from the white House, I thought it's going to be easier compared.

[Sizov] So similar to what we saw during his previous term, because there was a lot of, talk about China and all ‘20 if he became president in early 2000. ‘17. But actually for US tariffs against China were introduced only in 2018, more than a year later, but it's not the case this time because there was already, tariffs on, Chinese exports to the US, 10% tariffs. And and I think, it's not right now, it's not evolving, developing well for both countries because contrary to those, one day tariffs against Mexico and Canada, those 10% tariffs against China are still in place. China replied with some tariffs on the US. It was then I think one of them is a Trump adviser said it wasn't Trump. And she would speak shortly I think on February 4th. And that call didn't happen. And I think that trade war is far from being over. And that is bad news for, farmers, across the world, because China is obviously a big importer of crops, us included. And I see just for now, I see more escalation ahead because China definitely is not going to just to say, okay, we give up similar to what's Mexico and Canada say, because China thinks that we're preparing for this war for some time and they kind of plan what they will do after what after Trump's next moves. And this war is not over. And I think it could continue for some time.

[Yeager] It's interesting you talk about that phone call that didn't happen, because there was a couple of stories written about how phone calls had or had not happened between the two countries over the years and what that signals. So that is interesting that you that you talked about that, that that is still being viewed by others and not just those who are either trying to make news or trying to figure out if that's making news.

[Sizov] Yeah. And just to give you an example of why it's a problem, it could be a problem right now for this citizen, but it's likely to have longer term consequences because, for example, now, as all U.S. farmers know, China began to buy a lot of Brazilian crops soybeans, corn and all of that started after the trade war of 2018. So all those consequences after that, China swiftly approved Brazil supply because typically takes it could take up to ten years to get access to Chinese market. And that was done. Very sweet left as a trade war. And now Brazilian is number one supplier of many crops, China and so on. And that's why it's likely to have not consequences just only this year. And we see relatively weak Chinese inputs. But not only because of war but because of different balance sheets. But it's likely to have long term political consequences. One of them, China, would welcome more supplies in addition to Brazil, for example. And another one, I think it's a longer term story if you talk about China, but it makes sense to mention the Chinese clearly trying to boost its own production of all major crops. If a look, just look at headlines at news, at news for ‘24, ‘25 so that when you, for example, corn varieties, they invest a lot in agri technologies as they bought. I mean, I probably it won't be possible at this time, but I think it was the biggest, direct investment of China. Five, seven years ago, they bought Syngenta. It was a Swiss company and is one of the leaders, top producers, top scientific investments in R&D, in seeds and crop protection. It was Switzerland Swiss company in that time and now Chinese. So it looks like a kind of long term plan, which should lead to the fact that China would produce more. And at the same time, you have a flat population, slightly declining interpolation, which is getting older, which means that they are likely to consume less meat to capita, which means that demand is likely to shrink while the production domestic production is likely to grow, which is actually bad news for farmers around the world because China probably ten years won't be importing 10 or 100 million tons of soybeans like they're importing that.

[Yeager] Which then puts Brazil's crop on the market at more supply because they don't seem to be shrinking acres in their production. Or, they keep putting a whole lot into the hopper and into the bins, which means there'll be less demand for it, less demand for the U.S. crop globally if China takes care of themselves. So, yeah. Yeah, that has huge, reverberations that we have to watch out. Let's close with this. So, Andrey, biggest 2 to 3 stories that we're going to watch here in the next three months, four months, globally, when it comes to grains? Is it different than what we've talked about Russia and Ukraine and China. Are there other headlines or big stories that we need to kind of just make sure we're watching to see what happens?

[Sizov] Yeah, I think we had a good discussion and then probably covered some stories, but let's just summarize and prepare them once again. So, and probably I should also just say a few words, this analysis as an analyst that, fundamentally wheat has been very cheap and it's still very cheap. Look at stocks to use, all those, basic indicators. One's also relatively cheap, but not as cheap as wheat. Which global supply and demand is tighter than corn. And it shouldn't cost $5.5 per bushel or $5.8 per bushel, like, like right now. So we believe there is upside in wheat prices. And the question is what could be the trigger and the trigger. We could talk about that. So it's relatively bad weather in the northern Hemisphere. We have big problems in Russia and are likely to continue because, fortunately didn't have any serious cold. So, no winter kill. Will do limited, but at the same time. So it's like a slow snow, which means there won't be enough soil moisture in the stream for spring vegetation. Ukraine and the U.S, sorry, Ukraine and the and Europe say look more or less okay if you talk about wheat production and then we have, substantial problems in the US because we had a cold snap in Kansas several weeks ago and it had some winter kill. So the supply is likely to we could have some problems with supply, quite shortly. And as a region, we are closely watching its energy in Pakistan. Just a jump to another part of the world and northern hemisphere. It's very dry. It has been very dry. It's likely to remain dry during the February we, you know, if you follow which market you been sharing the story about engine with inputs for a long time. And it didn't happen for many years. But things could change this season or in 2025. Well, first of all, for Pakistan, which has very big problems with its own wheat crop and still a very big country. And India obviously is a very big country. So. Well, we could see some inputs there, small crop and some inputs, first of all, from Pakistan, which is also could be a better, bullish story, same time probably good crop in southern southern hemisphere is priced in, but I'm not sure about this trailer was a crop could be bigger than was expected earlier. It could and that's that could be a bearish story. Probably number one story for next, week. So many months and I'm afraid for could be for the whole 2025 is the Russian-Ukrainian war because as I mentioned, a lot of efforts, been a lot of time been invested in some of this conflict. And I think as, negotiations are actually going on now, it's confirmed, peacefully. But as I mentioned, it's, guarantee of any long term agreement, long term truce, unfortunately, is far from is very far from 100%. And that in turn could lead to another wave of escalation. And that could be a catalyst for, for a rally in wheat prices.

[Yeager] I know we joked before we started rolling that we could talk for 24 hours. And really, Andre, we could, there's a lot going on. So I appreciate, you giving us, you know, the latest report on kind of what's happening in there. And I certainly appreciate your expanding us, on the perspective that you have, of that market.

[Yeager] Thank you.

[Sizov] Thank you, Paul. Thank you everybody.

[Yeager] Thank you for watching this MToM podcast. New episodes. Subscribe. And like so you don't miss when they come out each and every Tuesday.