Why the death of Ukraine’s grain deal is not moving wheat markets

In the early morning darkness on July 17th, two explosions knocked out a section of the Kerch bridge that forms the sole link between Crimea and mainland Russia. Reportedly carried out by naval drones, it was Ukraine’s second successful attack on the bridge. Russia responded by firing cruise missiles at Odessa. It also confirmed it would be withdrawing from the agreement under which it had allowed Ukraine to export grain by ship across the Black Sea.

The accord, brokered by Turkey and the UN, was initially reached in the summer of 2022. Russia was eager to regain the sympathy of developing nations that had been hit by soaring food prices. In the months that followed Ukraine exported 33m tonnes of wheat, corn and oilseeds, helping to bring prices back to pre-war levels. The accord had been up for renewal.

Yet when Russia announced it was quitting, wheat prices barely budged. The market had been anticipating the Kremlin would refuse to play ball. Trade out of the Black Sea had been ebbing since May, when Russia began stopping ships from going to the port of Pivdennyi, which had accounted for one-third of Ukraine’s seaborne food exports since the deal was signed.

The deal may yet be resurrected, but the negotiations are tricky. Pointing out that its food and fertiliser sectors are exempt from Western sanctions, Russia is demanding that restrictions be eased on some of its state-owned institutions, such as the Agricultural Bank. But these have been proven to facilitate non-food exports like crude oil, so Ukraine’s allies are reluctant. Any new deal is likely to be shaky and short-term.

Even so, the global impact is likely to be muted. World wheat supplies are strong following exceptionally high exports from Australia and Russia and a rebound in Canadian shipments after droughts disrupted last year’s season. After falling for years, global stocks may finally rise in 2023. As for corn, Ukraine’s shortfall may well be filled by expected record sales from Brazil, reckons Alexis Ellender of Kpler, a data firm.

Instead the brunt of the effect will be felt in Ukraine. The high costs of alternative routes for exporting its grain—via rail and rivers through Europe—will force Ukrainian farmers to slash prices, discouraging planting. Grain production there is already 35-40% lower than before the war, notes Joe Glauber of ifpri, a think-tank. Greater use of these routes could also increase tensions between Ukraine and its eastern European neighbours, where its food exports compete with local produce for storage, railcars, port facilities and barges.

In the longer run Ukraine’s role as a major food supplier may fade, with nefarious consequences for global hunger. The country normally accounts for 10% and 10-15%, respectively, of the world’s exports of wheat and corn. Last year a major food catastrophe was narrowly averted, thanks to the resumption of Ukraine’s exports and bumper harvests across the planet. But a year may soon come when neither comes to the rescue.

Tags: corn, Turkey, export, prices, oilseeds, wheat, Black Sea, UN, food prices, Ukraine, barely, Russia