The strength of the euro against the dollar is proving an extra burden for European wheat exporters this season at a time when swelling global supplies have intensified export competition, traders and analysts said.
Grain export deals on the world market are conducted in dollars, so a higher euro makes exports from the euro zone more expensive when they vie with the likes of US and Russian grain in tenders held by major buyers such as Egypt.
Even if the euro has eased against the dollar from highs set at the end of September, this has not been enough to give much of a boost to European exports, operators said.
“The euro’s firmness has been the most penalizing factor since the start of the export campaign,” said Xavier Rousselin, grain markets specialist at French farm office FranceAgriMer.
“It has been more of a handicap than international demand, which has only been weak in relative terms.” The euro’s sharp rise in September, culminating in a one-year high above $1.48, coincided with a slowdown in European wheat exports as big harvest supplies in the northern hemisphere flooded the market.
This export gloom lifted slightly with talk among European traders of potential interest from Morocco and Iran, and the euro falling below $1.45 amid safe-haven dollar buying and comments from political leaders that they would address currency imbalances.
However, the euro bounced back above $1.47 (October 6th), a rise fuelled by a report, later denied, that Gulf Arab states were in talks to abandon the US currency in oil trade. “It would have to come down much more substantially to put us in a more competitive position versus our main rivals,” a European grain trader said.
Europe needs to forge ahead with its exports in a global market flooded by a second straight bumper crop and rising competition from the Black Sea region.
“We urgently need extra foreign sales to dispose of the surplus following this year’s big crop,” a German trader said. “The euro at $1.45 is poisonous for exports,” he added. So far this season, European Union wheat exports - led by euro zone producers France and Germany, but also including non-euro countries like Romania - have reached 4.7 million tons, down from a record 6.1 million tons a year ago, according to latest EU figures for export licenses.
BLACK SEA PRESSURE
The impact of unfavorable euro exchange rates on wheat exports was however relative to other exchange rates, analysts said, pointing to Russia and Ukraine, which have become big rivals to French wheat in its core North African export markets. “The heart of the matter is, does this penalize French grain versus Russian or Ukrainian origins?” said Emmanuel Jayet, head of agricultural research at Societe Generale. “You can’t tell without also looking at the hryvnia or the rouble.” The Ukrainian and Russian currencies also rose versus the dollar last month, although their levels remain relative to steep devaluations since the onset of the global financial crisis in late 2008.
Even with more favorable exchange rates, European wheat would still face a tough task shifting its large export surplus this season amid the global supply glut that has pushed US and European wheat futures down to contract lows in the past month. Assuming the euro does not weaken significantly, European exports will have to rely on further wheat price falls to remain competitive.
Easing competition once Russia starts planned state buying of grains and a possible move by Ukraine to curb exports later in the season would also help. (Reuters)