The Russian-Ukrainian conflict raises concerns about spring planting in Ukraine, with some official indicators pointing to a 50% reduction in planted area, to about 7 million hectares. In this context, the country should prioritize wheat production, aiming at food security.
Even though Ukraine has no significant share in global sugar supply, the Russian invasion may impact its grain production, particularly corn, and the country accounted for about 13.1% of the product’s exports in 2020/21. The result of the conflict over planting decisions will signal raw material availability for ethanol distillation in major players, especially in the United States and Brazil.
Sugar production by Ukraine corresponded to about 0.7% of global supply in 2020/21 (Oct-Sept). Recent geopolitical tensions bring uncertainty to the country’s beet-planting intentions, which usually begins at the end of March. Although to a lesser extent, a possible loss of beet area could result in a tighter global balance for the commodity in 2022/23.
So far, about 30% of the beet area is at risk, but the market is still waiting for the impacts to be assessed. Initially, considering a loss of 20% in 2022/23, the country could stop producing a volume just below 300,000 tonnes of sugar.
Sugar production in Ukraine (million tonnes)
*Estimated. Sources: USDA, IKAR & StoneX. Design: StoneX.
Wheat’s firm appreciation could also pressure beet area, but it should be noted that most farmers on the European continent have already purchased seeds for the next season. Therefore, there is little room for significant changes regarding the sowing decisions. On a long-term horizon, however, the price relationship with competing crops will be closely monitored in order to assess planting intentions on the European continent in 2023.
Specifically in Russia, damages should be minor, and beet planting also tends to start soon. The concern revolves around the economic sanctions imposed against the country, which can undermine farmers capitalization to purchase inputs, a point of attention for crops’ agricultural productivity. Estimates point to an annual increase of 20% to 25% in production costs.
Finally, barriers in the fertilizer market can also limit agricultural investments for productivity gains in other players. It is still early to estimate the effects of this on the global sugar balance, but these discussions will remain on the radar.
As mentioned, the political tension in the Black Sea should have a major negative impact on region’s spring planting, especially in Ukraine, and it will not be different for corn. In mid-March, the country’s Ministry of Agriculture declared that Ukrainian producers would sow up to 3.3 million hectares in the next season (Oct/22 to Sept/23), against 5.4 million hectares in 2021/22, which would represent a 38.9% decline. In relation to total production, a drop of 50% YoY is already estimated.
Using USDA data as basis and considering the average between 2016/17 and 2020/21, 79% of Ukrainian production is intended for the foreign market. As such, taking into account the weight of exports in the country’s balance and the fact that states tend to prioritize and stimulate the allocation of agricultural production to meet domestic needs in years of limited supply, the trend is that lower corn production would mostly reflect in reduced exports by the country. With this, if this 50% decline over the 2021/22 crop is confirmed, the country would harvest 20.9 million tonnes. Assuming that Ukraine maintains average crop consumption of 6.5 million tonnes as observed between 2016/17 and 2020/21, the country would have 14.4 million tonnes available to export (without considering stocked volumes), almost 10 million tonnes less than average shipments between 2016/17 and 2020/21.
With the reduction of Ukraine’s exportable surplus, the trend is that demand will be directed to the United States, Brazil and Argentina, which, along with Ukraine, form the group of the four biggest exporters. South American countries come from a year of very tight stocks; therefore, the disrupted chain of logistics in the Black Sea has reflected more in increased demand for US corn, which, despite also coming from a season of lower stocks still has a very significant volume capable of meeting occasional demand increases.
The USDA estimates that US shipments will total 63.5 million tonnes in the 2021/22 season (Sept/21 to Aug/22), 6.4 million less than in the last crop, but 5.9 million more than the five-year average. This estimate is calculated by considering Ukrainian exports in 2021/22 at 27 million tonnes. However, with continuing conflicts and logistical problems in the country, it is possible that this volume will be even smaller, increasing international demand for the US grain.
In the case of Brazil, expectations for the volume of exports are also positive. In 2020/21 (Feb/21 to Jan/22), Brazil exported only 20.9 million tonnes, reflecting the safrinha crop failure. With the expectation of record production for the second crop in 2021/22 (91.9 million tonnes) and a total of 118.6 million tonnes, on April 1st, StoneX released its new estimates for the grains crop, projecting that Brazil will ship 40 million tonnes in the current season. Despite the positive perspectives, it will be fundamental to monitor the weather in the coming months, since due to the higher risk involving the safrinha, the scenario may undergo major changes until the end of the season. Therefore, a successful safrinha is key for the country to be able to meet robust international demand and domestic use, currently expected to be 75.5 million tonnes.
In the US, the focus is already on 2022/23 planting, which will begin in this quarter. Last Thursday (31), the USDA released its report on planting intentions, indicating that the country will sow 36.2 million hectares of corn, 1.6 million less than in the 2021/22 crop and 1 million less than expected by the market. Considering the percentage of area that will not be harvested (which covers both abandoned area and that intended for silage) calculated by the Agricultural Forum (8.3%) and 11.4 t/ha yields (in line with the historical trend and considering normal weather), the country would produce 378.5 million tonnes, more than 5 million tonnes less than in the 2021/22 season, which tends to promote another year of strengthened prices, given the expectation of strong international demand and lower supply in the US. However, it is necessary to consider that much of the research was made before the conflict between Russia and Ukraine, and does not account fully for the rally in corn prices. Therefore, it is possible that planted area will be larger than estimated in the planting intentions.
How does this influence the ethanol market?
With crude oil’s rally on the international market, major players aim to increase biofuel blending in their fossil equivalents, in order to reduce dependence on crude oil and, consequently, follow the plans for decarbonization in the transport sector. This trend has already been observed on the European continent, and, with greater emphasis, in India. It is worth remembering that New Delhi achieved an average blend rate of 9.4% in 2022, with plans to increase its flex fleet in the coming years.
However, amid the possible unfolding of the conflict over corn supply, the market is attentive to the availability of feedstock for distillation, especially in regions that depend on corn for alcohol production, such as the US and Brazil. In the case of India, the sector has recently been betting on the expansion of its ethanol production capacity from grains.
For the current global cycle, the impacts should not be significant, since most of the plants acquired corn early. Nevertheless, it will be important to evaluate the prospects for the corn S&D balance in 2022/23 (Oct-Sept), a crop that may be marked by lower supply and high prices.
So far, the profitability of corn ethanol plants in the US is USD 0.275/gallon, 48.6% higher in the annual comparison. Despite the firm appreciation of the front-month corn contract in Chicago, ethanol and co-products also posted gains in the period, which limited more significant losses in the operation margin. In case the corn stocks/use ratio is tighter in the coming months, the expectation is that high costs may pressure the profitability of biofuel distillation in the country.
US corn ethanol plants’ profitability (USD/gallon)
Sources: EIA, USDA & StoneX. Design: StoneX.
In the Brazilian market, the returns with alcohol production from the grain are also attractive. StoneX calculations point to a profit of BRL 593.5 per tonne of corn in Mato Grosso, representing an annual increase of 36.1%. Assuming that demand for exports increased, or production was reduced, decreasing internal corn availability between October 2022 and September 2023, a considerable part of this impact would be absorbed by the livestock market, especially when considering the proportionally higher grain increase in relation to the price of the animals, which may pressure livestock confinement intentions, as well as limit the expansion of effective pigs and birds herd. In March, the StoneX market intelligence team produced a special analysis on the subject. You can access the full report
here.
It is worth noting, however, that the period of possible price increase may coincide with the sugarcane inter-crop period in the Center-South, when corn ethanol production takes on a greater role. In addition to posing a risk for feedstock availability in 2022/23 (Apr-Mar), the negative effects on plant profitability may also pressure distillation activities in the next season.
Of course, the possible impacts on the biofuel market will depend on the performance of the global corn stocks/use ratio and, mainly, on weather conditions over the coming months. As such, we still expect the corn ethanol supply to be 4.2 million m³ in the Center-South region in 2022/23 (Apr-Mar), a trend that will be constantly revised in our next crop estimates for the region.
In addition to these factors, the analysis of crude oil S&D fundamentals will also be important to draw more assertive perspectives regarding the level of ethanol trading in these players in relation to the cost of corn acquisition. Specifically in the Brazilian market, the 2022/23 crop (Apr-Mar) should be marked by a recovery in sugarcane productivity, leading to a more comfortable S&D balance for ethanol, a trend that is also supported by the decision to zero the ethanol import tax until the end of the current year.
