Forward contracts and defaults: to be or not to be. Ukrainian sunflower seed
Defaults are no surprise in view of the 2020 fall conditions. The share of defaulted forward contracts may reach 50% for sunflower seed and roughly 40% for corn.
The contract breach consequences for all agricultural market participants (from farmers to exporters) are even beyond description, as they are predicted to be extremely negative.
The weather conditions in 2020 have surely caused heavy losses to the sunflower crop. In late October, the crop size estimate itself (12 or 14 MMT) is no longer that important – it is more necessary to emphasize an unprecedented crop decline in 2020 from the 2019 record of 16 MMT.
The main question remains open – a sharp decrease in reliability of crop forecasts despite the application of quite advanced forecasting tools. This concerns both corn and sunflower. Space images did not help, other techniques did not work, and field surveys by analyst teams were obviously insufficient due to quarantine measures.
Vagueness regarding the sunflower seed crop leads to uncertainty in price behavior and even makes it impossible to reliably determine losses in the chain from farm to ship.
Unfortunately, in the end of October, each link of this chain seeks to close its position as soon as possible. However, this approach will ultimately result in defaults and market share losses. By the way, the U.S. sunflower area expanded by 29% in 2020 – this is a trend, you see, and an intention to take a bite out of the high-margin market.
In expectation of still more fantastic prices, sunflower seed sales are in decline, the deliveries are sometimes limited to 4-6 MT a day (maybe, they transport the commodity by bicycles).
Undoubtedly, just a neglectable number of sunflower seed suppliers will be ready to sell the commodity at prices 30-35% below the market level. However, similarly certain is the impossibility of infinite price growth, the more so as sunflower seed prices have already been securely fixed by those of sunflower oil, which are relatively stable for roughly two weeks now.
Quite probably, the lack of decisive steps by the government and all other participants of the supply and export chains will shortly lead to a sharp price adjustment in the sunflower seed/sunflower oil sector and, as a consequence, to bankruptcies and defaults of both farmers and traders.
Sunflower oil supplies in the world market will be replaced with other oils, orders of legal services will be record high.
UkrAgroConsult’s recommendation: it is topical now to search for compromise on the debt restructuring under previously signed agreements and contracts in order to make this market sector active again.
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