The Black Sea Grain Initiative came to fruition back in July last year after the UN, Turkey, Ukraine, and Russia agreed on the safe passage of vessels shipping agricultural commodities from three Ukrainian Black Sea ports – Odesa, Chernomorsk, and Yuzhny. The deal was originally set for 120 days with the intention for it to be extended by a similar duration. And while this initially happened, since March, Russia has only been prepared to extend the deal for periods of 60 days, which has led to elevated uncertainty across grain markets. In more recent months and in the lead-up to Russia pulling out of the deal, flows from Ukrainian Black Sea ports had slowed significantly with Ukraine suggesting that Russia was blocking vessel inspections. What’s the impact on global market prices?
Despite the many challenges and uncertainty with the deal, Ukraine managed to ship almost 33m tonnes of grain under the deal since August last year. This has seen CBOT wheat prices trading more than 20% lower between the period the deal was announced and Russia suspending its participation. Of the almost 33m tonnes shipped under the deal, 16.9m tonnes was corn, whilst 8.9m tonnes was wheat. The remainder of the flows were mostly sunflower oil/meal, barley, and rapeseed.
These are not the only export volumes. According to Ukraine’s agricultural ministry, the country managed to ship a total of 29.5m tonnes of corn and 16.8m tonnes of wheat in 2022/23. This would be due to the fact that Ukraine has also increased exports through other routes – via river, road, and rail.
However, challenges persist. Firstly, transportation costs will be higher than shipping from the Black Sea in dry bulk vessels, secondly, there will be capacity constraints as well as other logistical issues moving this grain westwards. There has also been pushback from neighbouring EU countries over the influx of Ukrainian grains, which has weighed on domestic prices. Poland, Hungary, Slovakia, Bulgaria, and Romania have restricted grain imports from Ukraine since the spring, although transit is allowed. Recently, these countries have pressured the EU to extend restrictions which expire on 15 September, given the expectation that more grains will flow westwards now.
Ukrainian grain is exempt from EU customs duties, which has made it cheaper than local production. As Reuters points out, Kyiv’s proximity and high logistics costs drove an unprecedented surge in its grain exports into the five states in 2022 and early 2023, creating sales disruptions, squeezing out regional crops from domestic and some export markets, depressing prices, and prompting farmers’ protests.
Poland’s grain imports rose nearly three-fold in 2022 to 3.27 million tonnes, of which 75% was Ukrainian grain, mostly corn and wheat. High imports continued until March 2023. In April, Poland and Hungary unilaterally closed their borders to imports of Ukrainian grain and other food.
In May, the EU allowed five states – Poland, Romania, Hungary, and Bulgaria – to ban domestic sales of Ukrainian wheat, maize, and oilseeds till June 5 – later extended to Sept. 15 – while still allowing transit through them for onward export.
Transit of wheat from Ukraine via Poland jumped to over 90,000 tonnes in June from between 43,000-51,000 a month in the first quarter of this year. Transit of corn increased to 170,000 tons in June from about 50,000-70,000 tons a month in the first quarter of this year, the Polish agriculture ministry reported.
Russian attacks against Ukraine’s inland port infrastructure on the river Danube – its last waterborne export route – in the weeks since the collapse of the Black Sea deal have piled further pressure on the EU to allow proximity grain sales again.
ING Bank reports that there have been some suggestions that the Black Sea Grain deal could continue without Russia. However, shipowners will likely be very reluctant to ship to these ports given the risks, particularly after Russia said that it would consider ships traveling to Ukrainian Black Sea ports as potential military targets. And even if shipowners were willing to risk calling at Ukrainian ports, obtaining the necessary insurance will not only be extremely difficult but also expensive. Therefore, Ukraine will likely have to focus on alternative export routes.
Poland, with an election due in October, has already said it will not open its border on Sept. 15, increasing pressure on Brussels to extend the protective measures. Meanwhile, Lithuania has asked the European Commission to develop a route for Ukrainian grain through Baltic ports. The five ports in Lithuania, Latvia, and Estonia have a combined grain export capacity of 25 million tonnes.
The key issue will be the economic viability of alternative land routes, known as “Solidarity Lanes”. Ukraine estimates the extra cost of the EU transit route at $30-40 a tonne. Transiting by land via Poland added 37 euros more per tonne than through Romania’s Constanta port, said Viorel Panait, the manager of port operator Comvex (CMVX.BX).
Prior to the conflict, Ukraine made up around 10% of the global wheat export supply, and last year the country managed to export 16.8m tonnes of wheat (less than 8% of the global wheat export supply), of which 8.9m tonnes was exported under the Black Sea deal.
Ukraine is forecast to produce 17.5m tonnes of wheat this season, down 19% YoY. As for corn, 25m tonnes is forecast to be harvested, down 7% YoY. There is a large risk that exports will now disappoint with no Black Sea grain deal, and if we were to see this, it would mean that Ukraine will be carrying larger stocks in their domestic market, which doesn’t bode well for domestic production in the medium to long term.
The global wheat market was already set to tighten this season, but assuming 3-4m tonnes of less Ukrainian export supply, the market would tighten even further – it would leave global wheat stocks (excluding Ukraine) at their lowest levels since 2015/16.
Since Russia’s comments that any vessels going to Ukrainian ports will be treated as a potential military target, Ukraine has said the same applies to any vessels going to Russian ports on the Black Sea. This increases grain supply risks significantly given that Russia is the world’s largest wheat exporter with significant flows from Black Sea ports. Risks are not isolated to Russian grains, there is the potential that this spills over into other markets, specifically oil, given the volumes shipped from Russian Black Sea ports.
One of the potential ripple effects of the latest developments is that governments around the world become more concerned about food security once again. And so there is the very real possibility to see the return of food protectionist measures, which could drive prices higher.