Ukraine’s grain supplies to Asia shrink as ‘lifeline’ Black Sea deal expiry looms
Ukraine’s grain shipments have been halted ahead of the expiry of a Black Sea deal with Russia this month, throwing into uncertainty food supplies to Asia from one of the world’s most productive regions and threatening to drive up prices.
The Black Sea deal, which was brokered by Turkey a year ago, allowed Ukraine to send agricultural goods from its seaports despite its war with Russia – but Moscow has said there are no grounds to further extend the deal beyond its July 18 expiry date.
“Our agricultural shipments have stopped completely in the last 14 days as Russian authorities have stopped inspecting our shipments to allow them for export,” said Alex Lissitsa, CEO of Warsaw-listed agricultural company IMC.
IMC owns 120,000 hectares of land in Ukraine close to the Russian border, on which it grows corn, wheat and sunflower. It usually ships half of the corn output to China, and also sends produce to Pakistan, India and Bangladesh.
An end to the Black Sea deal would mean nearly half of wheat and corn produced by 4,500 small Ukrainian farmers could end up rotting in the fields as they lack the storage capacity and need to sell the crops immediately, Bereshchenko said. Wheat is typically harvested in July and the income from sales helps farmers plant crops for the next growing season, which begins in the autumn.
Russia’s occupation means that around 20 per cent of Ukraine’s land is not available for crop cultivation, bringing down its agriculture output this year to about 80 million tonnes of grains and oilseeds from 100 million tonnes previously, Bereshchenko said.
But a drastic drop in domestic consumption – a result of the mass exodus of people since the Russian invasion in February last year – means 50-60 million tonnes will have to be exported, she said. In addition to the corn it exports to China, Ukraine is also an important supplier of wheat, sunflower oil and soybeans to India, Bangladesh, Thailand and other Asian nations.
“Ukrainian farmers will lose money on growing corn and wheat if they have to pay such high freight costs,” said Bereshchenko, adding that the farmers had started reducing their corn and wheat acreage and shifting to other crops. “If the Black Sea deal is not renewed, then the wheat and corn crop is going to be even lower.”
The Financial Times reported that the European Union was considering a proposal to allow Russia’s Rosselkhozbank to establish a subsidiary to connect to Swift, but Moscow has rejected the proposal as “unworkable” since it will take several months to set up.
Moscow has also opposed extending the deal because it says that Ukraine’s agricultural goods have flowed to “well-fed countries” and five of the poorest countries – Ethiopia, Sudan, Yemen, Somalia and Afghanistan – have accounted for only about one-quarter of shipments.
The pipeline, the largest of its kind in the world, carried ammonia from a petrochemical plant in the southern Russian city of Togliatti to Odesa in Ukraine for European markets. It was destroyed by unknown actors in June among a spate of arson and other attacks on Russian assets.
Commodity price patterns in the financial markets show that grain trading has turned into a “contango” – when the futures price of a commodity is higher than its spot price – an indication that traders are bracing for a deal collapse and tighter markets.
If the market’s worst fears come true, Asia will feel the impact as the region accounts for about one-quarter of Ukraine’s seaborne exports, though the impact may vary from country to country, Katona said.
“Russia cannot completely replace the grain coming from Ukraine if the deal collapses. However, they can export a significant quantity,” said Cedomir Nestrovic, a professor of geopolitics at the ESSEC Business School Asia-Pacific.
If Moscow embarks on such a grains-for-votes push, then global prices are likely to increase because there may be less supply available in global trading hubs, he added.
Such a development will hit many countries in Asia, especially as El Nino conditions – which increases ocean surface temperature – have disrupted monsoon rains that are critical to agriculture. For example, rainfall in Thailand during this year’s monsoon is expected to be 10 per cent lower than usual.
Global prices for grains and edible oils are likely to rise unless Russia and Ukraine extend the Black Sea deal, Chandrashekhar said.
“Food inflation will remain at elevated levels. A rising tide lifts all boats,” he added.
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