Iran Buys More Russian Wheat Despite Forex Payment Issues

EghtesadOnline: Iran’s state procurement agency, the Government Trading Corporation, reportedly purchased several hundred thousand tons of Russian milling wheat last week for April and May shipment.

News ID: ۷۵۲۳۴۴

12 March 2023

The tender caught most of the market by surprise, especially with Iran’s wheat harvest expected to commence in May, UkrAgroConsult reported.

News of the deal came as vessels carrying more than 650,000 tons of Russian wheat remain stranded at the major Iranian ports of Bandar Imam Khomeini and Bandar Abbas, unable to discharge due to documentation issues and foreign exchange payment delays.

Some of the vessels have been anchored in the Persian Gulf since September last year, as the Central Bank of Iran’s lack of foreign currency reserves severely hampers the flow of essential goods, such as wheat and sugar, into the country.

With the demurrage bills growing daily, Russia sent a trade delegation to Iran on Jan. 25 in an effort to resolve the issue. The negotiations resulted in an Iranian government agreement to pay for all agricultural products caught up by the payment delays. However, virtually nothing has been discharged and released by shippers since the meeting.

The quality of the food cargoes after they are finally discharged is a rapidly escalating challenge due to the extraordinarily long delay in the vessel holds.

Western sanctions on Iran over its nuclear program exclude food imports, but the restrictions have severely affected the country’s financial system, necessitating complex and unreliable payment arrangements with its international suppliers. The value of the Iranian rial has dropped by almost 50% against the US dollar since the failure of nuclear talks with the West in September, exacerbating the dire situation.

In November last year, a report released by Iran’s Ports and Maritime Organization put the discharge backlog due to the payment delays at the port of Bandar Imam Khomeini alone at 37 vessels carrying 2.2 million tons of goods, including commodities such as wheat and sugar. The value of those distressed cargoes was put at more than $1 billion.

Discharge Backlog at 8m Tons in February

By early February, the Islamic Republic of Iran Customs Administration said that at least 8 million tons of essential goods were sitting on ships anchored off the country’s Persian Gulf ports.

Last week’s deal is believed to be a government-to-government agreement that will most likely be executed by a select band of well-connected Russian exporters. As such, the extremely costly discharge delays will be mitigated, as these cheaper shipments will reportedly go straight to the front of the discharge queue.

Ironically, most of the wheat held up at the Persian Gulf ports by the government payment issues are reported to be purchases made via previous GTC tenders. And with the buyer well out of the money following the decrease in international prices, the sellers are reluctant to let Iran off the hook by cancelling the deals and booking significant losses.

Most sales concluded with private buyers in recent months are believed to have experienced minimal delays with payment made, and the grain discharged largely within contract terms.

Food security is a priority for the Iranian government. Drought drastically decreased domestic production in the 2021 harvest, culminating in record wheat imports of 8 million tons in the year to June 2022.

In Iran’s crop year ending August 2022, the Agriculture Ministry reported wheat production of 11.5 million tons off 4.9 million hectares, an increase of 45% compared to the previous season. A far more favorable growing season, a 50% fall in the subsidized price for fertilizer and pesticides, and an increase in the planted area following a 130% increase in the government’s guaranteed purchase price were the primary contributing factors.

Wheat is considered a staple in Iran, and the government purchases it from farmers every crop year to build up its reserves and regulate supply to the market over time.

The government purchased 7.5 million tons of wheat from local farmers after last year’s harvest, up from 4.5 million tons the previous year. However, despite the significant jump in production, wheat imports are still expected to be around 5.5 million tons in the current marketing year, assuming the hard currency issues are resolved soon. In the five seasons prior to 2021-22, wheat imports averaged just 1.2 million tons annually.

Iran was Russia’s third biggest wheat customer in the fiscal 2022-23, importing a total of 1.8 million tons, down 55% compared to 2021 shipments of 4 million tons. The biggest importer of Russian wheat last year was Turkey with 4 million tons, down 5.2%, followed by Egypt, which registered a 12.6% rise to 3.5 million tons.

Trailing Iran on the list was Saudi Arabia with 1.5 million tons, up 119%, and Algeria with 1 million tons, up 270%.

Iran’s barley production in its 2021-22 crop year was up 11% to 3 million tons, on par with the average of the past five years. Imports are pegged at 2.7 million tons in the 2022-23 marketing year, slightly higher than the five-year average of 2.5 million tons as stockfeed manufacturers increase barley inclusion rates at the expense of wheat.