ANALYSIS: Ukraine’s sunoil market is on fire but will it last?

Ukrainian sunoil prices have surged about 8% over the past week to their highest in more than five years because of tight supply for nearby volumes, coupled with delays in harvesting, high demand and a deteriorating production outlook.

A lack of sunoil sellers in Ukraine - the world’s largest producer and exporter - fuelled prices of nearby contracts this week, with cargoes for October loading reaching $840/mt FOB Chornomorsk by Friday, the highest since June 2015.

"The main reason for the current price growth is the delayed harvesting, as traders expected that it would have started earlier and have commitments for large export volumes for September,” one trader told Agricensus.

“Now September is just around the corner but there are no seeds - but contracts need to be fulfilled somehow, so we see panic in the market,” he added.

According to market sources, the line-up for September exports is at around 450,000 mt, which “puts exporters on edge” given very low port stocks and a lack of offers from crushers.

“Good demand from the three top buyers - India, China and the EU - is only adding fuel to the fire on the sunoil market,” a second Ukrainian trader said, adding that China is the most active participant on the spot market.

About 2 million mt of Ukrainian sunoil has been sold for October-through-December shipments, trade sources told Agricensus, with India and China purchasing about one third of this volume.

Fading expectations

The increase in sunoil prices is also supported by deteriorating estimates of Ukrainian sunseed production after crops were affected by hot and dry weather in July and August.

“Everyone is looking at the first seeds, which are bad, so it keeps the sunoil prices up," one Ukrainian crusher said.

“Everyone is worried about the crop size, as the yields of the first cuttings are disastrous,” a third Ukrainian trader told Agricensus.

Sunseed yields in the south of Ukraine are reportedly below 1 mt/ha, half of last year’s levels. The lowest numbers are coming from the Odesa region, which provides about 6% of Ukraine's total sunseed production.

“This season 0.7 mt/ha is the best sunseed yield we got compared with last year’s average of 2.2 mt/ha. The main reason is the lack of moisture,” a farmer from the Odesa region said.

"The paradox of this year is that parts of the south look much better than the entire centre of the country,” the third Ukrainian trader said, adding that the Kirovograd and Dnipropetrovsk regions, each of which accounts for about 10% in Ukraine’s total sunseed production, were hit hard by the drought.

A farmer from the Dnipropetrovsk region told Agricensus that there was no rain for six weeks, which resulted in non-filling of the seeds.

“The seeds are large but they are empty inside,” he said.

“We sold 400,000 mt of sunseeds on forward contracts but we will harvest 300,000 mt at best due to poor yields in the southern and central regions,” a source from one Ukrainian agroholdings said.

Given the dry weather conditions, Ukrainian consultancy APK-Inform Agency lowered its forecast for sunseed yields to 2.56 mt/ha from 2.6 mt/ha.

“However, owing to a 2% increase of the planting areas to 6.4 million ha, sunseed production forecast remained unchanged and totalled 16.2 million mt,” the agency said.

“We expect sunseed yields to be worse than last year. At first, we estimated production at 16.3 million mt and now we are looking towards 16 million mt,” the Ukrainian crusher told Agricensus.

Current sunseed production estimates of Ukrainian traders and crushers range from 15.5 million mt to 17 million mt, but the majority expect output of between 16 million and 16.5 million mt.

Besides the crop size, the market is also concerned about the quality of Ukrainian seeds, which may also be affected by the hot and dry weather.

“The first sunseeds that are going into crushing plants are of a small size and are very dry with low oil content,” the Ukrainian crusher told Agricensus.

“There is a high probability that due to the heat, the oil content of seeds will decrease, which will lead to a reduction in the production and export of sunflower oil in the new season,” APK-Inform Agency said.

Harvest pressure to cool prices

The domestic sunseed market is also rising, up 3% since the start of the week at UAH11,200/mt ($408/mt) including VAT on a CPT port basis because farmers are holding off from sales in the expectation of further price increases.

"Farmers are rather reluctant to sell seeds but there are some offers because current prices are higher than last season. Besides, when the mass harvesting begins, prices will probably drop,” the Ukrainian crusher said.

Indeed, most market participants believe sunseed and sunoil prices will both fall, succumbing to seasonal harvest pressure that is expected within one to two weeks.

“Sunoil prices should go down as harvest progresses and sunseed supply increases. In addition, many small and medium-sized crushers trade sunoil on the spot, and when this oil comes on the market, the supply will increase significantly,” the crusher added.

“This bubble in the sunoil market will burst once sunseed harvesting in the main producing regions starts and yields increase,” the second Ukrainian trader told Agricensus, adding that he expects this will happen by September 10-15.