Commodities crop tour

8/20/2019 Commodities crop tour

1/8

Back in late 2014, I was tasked with designing a European crop tour for Thomson Reuters. We

wanted to get into the elds and talk with industry participants in key grain regions, and then

translate that information into actionable insight for the market.

Problems had been reported in Russia since winter grains had been sown into dry soil last fall,

and the market was quite concerned that the crop would not recover. Many groups, including US

Department of Agriculture (USDA), had not planned to travel to Russia this year, so the demand

was particularly high.

France was also a target as the leading grain-producing nation in the European Union.

Prolonged dryness began to set in a few weeks before our trip and by the time we departed for

France, the market became glued to the tour.

I spent four days in both Russia and France traveling with a Reuters agriculture correspondent,

conducting interviews and eld surveys along the way.

This tour was intended to be far more than data collection. We wanted to equip a wide audience

with a wealth of knowledge about these regions that could only be obtained on the ground. Not

only did we get a handle on current crop conditions, we have shed some light on the current

status and future of Russian and French grain production.

Russia, May 25 – May 28, 2015We spent four days traveling through Krasnodar, Rostov, and southern Volgograd in Russia’s

Southern grain belt. Everyone always has an eye on this area since one-third of Russian wheat

production and the majority of Russia’s wheat exports originate here.

Commodities

by Karen Braun, SeniorAnalyst, agriculture

and weather, ThomsonReuters. Karen focusesprimarily on European

and Black Sea grain andoilseed production forthe Lanworth team at

Thomson Reuters. She is ameteorologist by training

and also leads Lanworth’sclimate research efforts.

Photo: ©Kazbek Basaevlocation: Volgograd Oblast, Russia

76 | September 2015 - Milling and Grain


2/8

Report verifcation

One key takeaway from the Russian trip was that early reports

do not warrant panic, just a watchful eye.

Shortly after sowing, Russia’s Agriculture Ministry reported

20-30 percent of southern winter crops to be in weak or thinned

condition since they had been planted into dry soils. These

reports had me a bit alarmed but also skeptical, wondering whatto make of it. Above all, I wondered if there was any chance for

recovery. After the trip, I was able to answer that question with a

resounding yes.

The wheat crop was held up by a mild winter and come spring

emergence, it would all depend on rain. In Krasnodar, spring rains

were very timely. Volgograd and much of Rostov were not as

lucky, as it remained too dry come March and beyond.

There was much disparity between wheat we saw on day one

versus day four. Plants in Volgograd were sparse, short, and

parched. The elds looked to be in a very sad state, and even

sadder, the rains that farmers told us they needed never came.As of 25 August, harvest reports indicate that wheat yield in

Volgograd fell at least four percent on the year.

Farmers in Krasnodar and parts of southern Rostov were lucky.

It rained the week after we left, just as they needed it to. Stefane

Photo: ©Kazbek Basaevlocation: Rostov Oblast, Russia



Milling and Grain - September 2015 | 77


3/8

MacFarlane, CEO of RZ Agro, conrmed in early August that

wheat yields in southwest Rostov, where his main operation

is located, ended up a bit better than last year. Final yield in

Krasnodar is reported to be up 2 percent on the year.

Yield on an upward trend

Identifying long-term trends in yield data is important in

forecasting crop production. An upward trend in the Russian wheat

data seemed somewhat obvious to me, though I couldn’t be sure.

Every single person that I raised this question to had the same

answer: Russian crop yields are certainly climbing. This is due

to improvements in technology, equipment, and maintenance,

especially in the last decade. A quick look at wheat yields since

1990 in the Southern District show, on average, and improvement

of one percent year-on-year over the past 15 years.

I believe this means that the face of Russian grain farming may

be changing. With better seed technology and optimised fertiliser

use, amongst other factors, Russia may be shifting away from

its “swing” country status in terms of the global balance sheet.

Increased technology should lead to more stability.

France, June 8 – June 11, 2015

We covered quite the distance in four days, traveling to Picardie,

Bourgogne, Centre, and Poitou-Charentes. Everywhere we went

agronomists were talking about how dry it had been. Luckily for

wheat, much of the plant growth occurred before the soils dried

out, but losses were still present. Corn and other spring crops have

been the biggest victims of the summer drought.

Slight slip for wheat yields

French wheat looked in great shape coming out of the winteraccording to the data. By May, I noticed that it hadn’t rained in

almost a month, and forecasts remained dry. But weekly condition

ratings were sky-high, so I began to question my hesitance.

In hindsight, my concerns were justied. Spring rainfall was

15% below normal, the same amount as the year before, which

saw a very average crop. Every French agronomist that we spoke

with commented on how record wheat yield had been a real

possibility this year prior to the dryness onset.

It is clear that record yield is not possible if the rains shut off

come spring, even if prior conditions were perfect. Harvest is now

complete and the crop is teetering on the brink of record volume,

supported by large sown area. If yields had lived up to initial

hopes, this year’s wheat crop would have crushed the record.

Corn fears

At the start of summer, everyone seemed to still have the record

corn crop hangover from 2014, perhaps forgetting that weather

also played out perfectly last year.

This year’s crop was sailing along smoothly according to the

experts at the time of our trip. But they warned that everything

would change if the summer stayed dry, and it did just that.

Summer drought has sent this year’s French corn crop on a

disaster course. Germain Bour of Cerepy in Burgundy recently

told me that their corn harvest is expected to be 20 percent to 30

percent smaller than last year. France may harvest their smallest

corn crop since 2003.

I was previously unaware how big the role of irrigation is

to corn farming. Fifty percent of French corn is irrigated, but

restrictions have tightened in recent years, causing farmers to rely

on the rain more than ever.

In other words, summer rains will make or break French corn.

Last year, France did not have to limit irrigation activities. Heavy

limitations were already in place by late July and as the dryness

gets worse, so does the availability of water.Water worries have also caused French farmers to turn away

from corn in recent years towards crops that are more resilient in

dry weather.

“Identifying long-term trends in yield

data is important

in forecasting crop

production. Every

single person

that I raised this

question to had

the same answer:

Russian crop yields are certainly

climbing ”

Photo: ©Kazbek Basaevlocation: Krasnodar Oblast, Russia



4/8


5/8

Where have we been since?In early August, I led a segment of Thomson Reuters’ United

States crop tour through Minnesota and Iowa. We sampled several

cornelds along the way and chatted with a couple farmers.

The US corn crop has become a hot topic since USDA’s highly

optimistic August yield report, which sent many analysts and

traders on the defence of their bullish positions.

Our teams traveled across the Midwest, from Nebraska

to Ohio, and collected 173 corn samples in the process. We

ultimately concluded that there is a likely upside to what the

market was expecting, and one week later, USDA’s estimate

reected our sentiment.

We found that although

there are problems in the

Eastern Corn Belt (Ohio,

Indiana), the huge crop in

the west (Minnesota, Iowa)

should offset much of

those losses.

Final thoughts

I have previously done

several eld tours in the

United States and a couple

in Ukraine, and each trip

always conrmed that sight

unseen forecasts can be

tricky. No matter how rich

the data you acquire sitting in a cubicle, nothing can quite replaceboots on the ground.

As such, crop tours will continue to play a critical role in our

operations. In September, a Thomson Reuters analyst will head

to China to survey the corn crop. I hope to return to Europe in the

fall to interview producers in southeastern Europe, and we will

return to South America for the sixth year in a row in early 2016.

My nal thought will also be one of gratitude. Everyone I met

with both internationally and at home was welcoming, friendly,

and eager to engage in open dialogue. Their hospitality helped to

make these trips complete, so for that I say thank you.

Photo: ©Karen Braunlocation: corn ears in northern Iowa(left) and southern Minnesota (right),early August



6/8


7/8

In Bunge SA v Nidera BV, the UK Supreme Court

held that buyers could only recover nominal

damages (only US$5) for premature cancelation of

a contract of sale on GAFTA form 49. This article

looks at the reasons why the damages were reduced

and the impact on GAFTA cases going forward.

The case was unusual – not many parties agree

arbitration in their contract and then nd themselves

in the English Supreme Court ve years later! The

issue was one of importance in the trade, however, and so it

was permitted to proceed through the High Court, the Court ofAppeal and the Supreme Court following the arbitration outcome

in GAFTA. The outcome has an impact on damages assessments

under many sale contracts that have a damages or default clause

(not only GAFTA and FOSFA): the clause will not now usually

be the only calculation of damages to be made in assessing loss.

Background Facts

The dispute related to the sale of Russian milling wheat on

FOB terms by Bunge SA (sellers) to Nidera BV (buyers). The

contractual delivery period was 23 to 30 August 2010. The

contract incorporated GAFTA form 49, which included the

standard GAFTA default clause (clause 20), which provides

a contractual scheme for establishing damages payable in the

event of default by either party (based on a contract price versus

market price comparison). On August 5, 2010, the Russian

Government introduced an embargo on agricultural exports to

run from August 15, to December 31, 2010. On August 9, 2010the sellers purported to cancel the contract in accordance with a

prohibition clause in the GAFTA contract. The buyers rejected

this (correctly, as it turned out) and alleged that the sellers had

cancelled the contract prematurely, since the export ban had

not yet come into effect. Accordingly, the buyers treated the

“Golden Victory” for GAFTA sellersDamages for premature cancelation of a contract of sale reduced from

US$3 million to US$5 by the UK Supreme Court

by Vassiliki Payiataki, (Partner) and Diane Galloway, (Partner), Reed Smith

Commodity news



8/8

sellers’ action as a repudiation of the contract, and terminated

the contract for that repudiation on August 11, 2010. The buyers

commenced arbitration proceedings at GAFTA against the sellers

seeking damages under the GAFTA default clause in the sum of

US$3 million.

GAFTA Arbitration and Early Court Decisions

The rst tier arbitration tribunal at GAFTA dismissed the

buyers’ claim on the basis that, although the sellers had

prematurely cancelled the contract, the contract would have been

cancelled in any event due to the export embargo and therefore

the contract was of no value. Accordingly it was found that the

buyers had suffered no loss and were not entitled to any damages.

The buyers appealed that decision to the GAFTA Appeal Board

and succeeded in their claim. The nding was that the Sellers

were in breach for wrongful early cancellation and the Buyers

were entitled to substantial damages under the GAFTA default

clause. The sellers challenged the GAFTA Appeal Award in the

English Courts. Both the High Court and the Court of Appeal

agreed with the GAFTA appeal award and held that the buyers

were entitled to approximately US$3 million in damages.

Supreme Court DecisionThe sellers were granted permission to appeal in the Supreme

Court. As mentioned earlier, a rareed few arbitration cases

make it this far, but the issues were important. There were two

issues before the Supreme Court:

1. Does the GAFTA default clause exclude the usual common law

principles for the assessment of damages?

2. If not, is the overriding “compensatory principle” established

by The Golden Victory (an earlier Supreme Court decision

on a case of wrongful repudiation of a time charter by the

charterers) applicable to one-off sale contracts, such as in this

case, as opposed to instalment contracts? We deal below with

what this case was all about.

The Court allowed the sellers’ appeal. The buyers could only

recover nominal damages of US$5 on the basis that they had

suffered no loss, because it was clear that the sellers would have

been entitled to cancel the contract without liability shortly after

the breach.

The GAFTA Default Clause: a complete code for damages?

The Court stated that damages clauses, such as the GAFTA

default clause, are not to be regarded as complete codes for the

purpose of assessing damages to be awarded to the innocent

party. The GAFTA default clause provides a detailed code for

determining the market price or value of goods that either were

actually purchased by way of mitigation or might have been

purchased under a notional substitute contract. It does not,

however, address the effect of subsequent events that would have

resulted in the original contract not being performed in any event,

nor does it exclude every other consideration that may be relevant

to determine the actual loss suffered by the innocent party. In

these circumstances, usual English common law principles on

recoverable damages continue to apply.

The Golden Victory

The Golden Victory was an earlier case, which caused much

legal academic disagreement. The basic idea is that you can look

at damages and loss suffered from a view point after the breach to

see if there is any loss rather than assess damages at the momentof the breach. The rst approach may give a fairer and more

realistic result, the second approach gives certainty - the parties

know where they are at the moment of the breach.

The different approaches can lead to very different results. In

Bunge v Nidera, the difference was US$3 million!

Bunge versus Nidera

The Court in Bunge versus Nidera supported the decision in

The Golden Victory, that when assessing damages it is right to

take into account supervening events known at the date of the

assessment of damages, such as the Russian export ban in this

case. It was fundamental to any assessment of damages designed

to compensate the innocent party, to consider at the date of

assessment what would have happened after the breach, if the

breach had not occurred. Commercial certainty is important, but

it is even more important not to award substantial damages to

a party who has suffered no loss. A construction of the default

clause that would place the innocent party in a better nancial

position than if the breach had not occurred is unlikely (said the

Court) to have been intended by the draftsman of the clause.

The Court further expressed a view on the application of the

common law principle of mitigation of loss. The Court rejected

the argument that the GAFTA default clause precludes the

operation of the mitigation principle. Although the GAFTA

default clause deals with the innocent party’s duty to mitigate its

loss by going into the market to buy or sell against the defaulting

party, it does not deal with any other aspect of mitigation.

Damages therefore may be affected by an act of mitigation

committed by the innocent party or by an offer made by the

defaulting party, which would have been reasonable for the

innocent party to accept.

Why is this an important decision?

The purpose of damages for breach of contract is to put the

innocent party back in the position it would have been, had the

contract been performed. The Court decided that the innocent

party will not be allowed to take advantage of the difference

between the contract price and the market price at the time andmake a prot under a contract which would have been cancelled

in any event, even where a simple read up of the Default Clause

would have led to a prot.

The signicance of this decision is not limited to those

parties contracting on GAFTA or FOSFA terms. It is relevant

to the interpretation of express damages clauses in any sale or

commercial contract.

When assessing damages the arbitral tribunal or court should

take into account supervening events known at the date of

assessment which would have caused the loss suffered to be

reduced or extinguished. This makes the assessment more

complicated than previously thought, and the enquiries, whichcan be made by the arbitrators more wide ranging.

The common law principles including the compensatory

principle established in The Golden Victory and the principles of

mitigation will not be excluded by a damages or default clause,

unless very clear and express words are used to achieve this.

Commodities special feature

The Court decided that the innocentparty will not be allowed to take

advantage of the differencebetween the contract price andthe market price at the time and

make a proft under a contract

which would have been cancelledin any event

Milling and Grain - September 2015 | 83

Date post:	07-Aug-2018
Category:	Documents
Upload:	milling-and-grain-magazine
View:	215 times
Download:	0 times

Commodities crop tour

Documents