In August the amount of grain exported from Russia reached 5.2 mln tons, including 4.5 mln tons of wheat, according to Sovecon. It was an absolute record for a monthly exports from Russia.

Analysts put it down to a weakened rouble, early harvests and high export prices. With the improved port facilities in the Black Sea this year, 9.8 mln tons of grain have been exported from the beginning of the new season lasting until 30 August 2018, according to the Russian Ministry of Agriculture. This is 39% more than last year’s figures, with wheat exports increased by 60 % to 8.2 mln tons.

In July – August there were several large contracts concluded for shipments scheduled for September. On this basis, analysts predict the rate of exports in September to stay at approximately the same level[unchanged]as in the summer.

However, last week market prices went slightly down with wheat being sold for $223 (FOB) per metric ton; $2 less than the week before, and the spread between asking and achieved prices increased. This has led to the prediction of a slowdown in export activity.

Last week, the Russian Ministry of Agriculture issued an official warning about possible export duties, although this could not be confirmed by the Ministry during a meeting with the major grain exporters.

So, should we expect defaults on sales contracts, and how can buyers protect themselves from seller’s failure to supply?

From a commercial perspective, traders should perform due diligence in relation to suppliers and stay alert regarding export duties/embargoes.

From a legal perspective, buyers must ensure that the default procedure in relation to the shipment of their cargo is detailed in the contract and followed by the parties. In particular, if an extension of the shipment period is permitted by the contract, then such extension should be agreed in writing (an exchange of emails should do), and the new terms should be followed. The buyer must  be cautious not to allow an endless chain of further extensions, allowing the seller to get away with non-performance.

If the buyer intends to seek damages arising from the seller’s non-performance, he must place the seller in default. The contractual default procedure in each case should be followed precisely. If such procedure is not set out in the contract, then the buyer should refer to the term(s) repudiated by the seller and expressly state the seller’s failure to act/perform the contract.

The seller may be liable for damages arising from the default either on the basis of the price difference between the contractual price and a new sales contract concluded by the buyer, or between the contractual price and market price as of the next business day after the original seller was placed in default.

If the buyer is relying on market data, he should collect it during the couple of business days after the default and keep it on file.

Given that the prices have slightly gone down, the wheat market for October shipments is likely to cool down, and defaults by suppliers in these circumstances are unlikely. However, the growing spread between asking and achieved prices may be consolidated if export duties in Russia or embargoes in Ukraine are introduced.

If buyers need to protect themselves from sellers’ defaults or to seek damages arising from such defaults, they are likely to find it easier if their contracts are reviewed by lawyers at the stage of conclusion, or if lawyers are consulted prior to placing the seller in default. Subject to the seller’s sound status, buyers should be able to recover their damages in full.

Svetlana Galitsky
5 September 2018

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