2023-07-17 16:27:43
The deal allowing Ukraine to export grain via the Black Sea will expire on Monday after Russia announced it was suspending its participation.
The grain deal with Ukraine, negotiated by the United Nations and Turkey last July, aimed to alleviate the global food crisis by allowing the safe export of Ukrainian grain blocked by the conflict between Russia and Ukraine.
Why is this grain deal so important?
Ukraine is a major producer of grains and oilseeds. The interruption of its exports at the start of the war caused world food prices to rise to record highs. The agreement, reached in July 2022, some five months after the start of the war, helped lower prices and alleviate the global food crisis.
Ukrainian cereals also played a direct role with 725,200 tonnes or 2.2% of supplies shipped through the corridor used by the United Nations World Food Program (WFP) to help countries such as Ethiopia, Somalia and the Yemen.
What does this mean for food prices?
However, the situation is better than in the months following the start of the war, because the supply of cereals from other producers, such as Brazil, has increased.
Prices for wheat, the main ingredient in bread, have fallen by around 14% since the start of the year and those for corn by around 23%.
The current global food crisis is far from over, however.. WFP said last month that multiple emergencies had overlapped, creating the largest and most complex food and humanitarian crisis in more than 70 years.
In 2022, a record 349 million people suffered from acute hunger and 772,000 were on the brink of starvation, the WFP said in its annual report.
What is the state of the world’s food supply?
Global maize stocks started the 2021/22 season at their lowest level in six years. The invasion of Ukraine by Russia, one of the world’s leading maize exporters, therefore led to a sharp rise in prices.
Nevertheless, a strong increase in exports from Brazil has since helped increase supplyas well as the export of almost 17 million tonnes of maize through the corridor.
The United States Department of Agriculture (USDA) predicts that global corn stocks at the end of the 2023/24 season will reach their highest level in five years.
World wheat stocks are tighter and set to reach their lowest level in eight years at the end of the 2023/24 season, according to USDA data.
What would this mean for the World Food Program (WFP)?
The WFP purchases several million tons of food every year, of which about 75% is cereals. In 2021, WFP purchases amounted to 4.4 million tons, Ukraine being its main source of supply, with 20% of the total. Ukraine mainly supplies wheat and split peas.
Most food goes to Africa and some West Asian countries like Yemen. WFP therefore tends to source from Eastern Europe, which is closer than the main producers in North or South America.
WFP shipped 725,200 metric tons through the corridor. It will have to look elsewhere, at a potentially higher cost, while a lack of funding has already forced it to reduce its activities in certain countries.
What was exported?
Under the pact to create a safe navigation channel, Ukraine was able to export 32.9 million tons of agricultural products, including 16.9 million tons of corn and 8.9 million tons of wheat.
Before the conflict, Ukraine exported around 25 to 30 million tonnes of corn per year, mainly via the Black Sea, and 16 to 21 million tonnes of wheat.
The ability to move grain through the Black Sea under the pact was limited by the inclusion of only three ports.
Why is Russia withdrawing from the grain pact?
Russia has repeatedly said it sees no reason to extend the deal. She claims that the commitments made to remove obstacles to the export of Russian foodstuffs and fertilizers have not been respected.
Among Moscow’s demands is the reconnection of the Russian Agricultural Bank (Rosselkhozbank) to the SWIFT payment system.
Other requests relate to the resumption of deliveries of agricultural machinery and partsthe lifting of restrictions on insurance and reinsurance, the resumption of the Togliatti-Odesa ammonia pipeline and the release of the assets and accounts of Russian companies involved in food and fertilizer exports.
Can the corridor work without Russia?
Ukrainian ports were blocked until the agreement was concluded in July last year and it is not certain that it is possible to ship grain now that Russia is withdrawing from the pact.
Premiums for additional war risk insurance, which are charged when entering the Black Sea area, would increase and shipowners may be reluctant to allow their ships to enter a war zone without Russia’s consent.
According to insurance industry sources, hedging arrangements could change quickly. War risk insurance policies have to be renewed every seven days for ships, costing thousands of dollars.
Can Ukraine export more grain through the European Union?
Since the start of the conflict, Ukraine has been exporting large volumes of cereals via eastern EU countries. Nevertheless, many logistical problems arosein particular because of the differences in the gauge of the railways.
Furthermore, the passage of Ukrainian cereals through the eastern EU has caused unrest among farmers in the region, who claim that they have been sold at prices lower than those of the local supply and that they were bought up by flour mills, thus depriving them of an outlet for their crops.
As a result, the EU allowed five countries – Bulgaria, Hungary, Poland, Romania and Slovakia – to ban domestic sales of Ukrainian wheat, maize, rapeseed and sunflower seeds, while allowing the transit for export to other countries. This measure will be phased out by mid-September. Larger harvests are also expected in the eastern EU this summer and major ports, such as Constanta in Romania, are expected to struggle to manage the volume of grain they are likely to receive, leading to traffic jams and delays in shipments.
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