Maksym Kharchenko
Logistics Market Analyst
UkrAgroConsult
November 19 was the expiry date of the first stage of the “grain deal.” On November 17, the Infrastructure Minister of Ukraine announced the extension of the deal for another 120 days. Nevertheless, most sales remain on hold until the situation is clarified.
Grain market had a chance to see a “trial version” of the deal’s termination on October 29, when Russia announced its withdrawal from the agreement. However, the Big Odesa ports kept loading ships, and the Joint Coordination Center in Istanbul continued its inspection work. So, 14 vessels carrying almost 430 K mt of grains, oilseeds and processed products left the Odesa ports between October 30 and November 1. The UN and Turkey, taking advantage of the absence of the Russian federation, increased the number of inspection teams to 10, thanks to which the Joint Coordination Center inspected 46 vessels with 1.7 M mt of Ukrainian agricultural products on October 31 alone. As a result, the queue of both outgoing and incoming vessels waiting for inspection in the Bosphorus was reduced to 147.
The short-term refusal of Russia to participate in the “grain deal” once again made us think about the future prospects of agricultural exports from Ukraine. The above-mentioned practice shows that the deal may be terminated at any moment, which suggests UkrAgroConsult to consider two scenarios for further exports – optimistic and pessimistic ones.
Optimistic scenario: the “grain deal”
will be extended each time after the
1. How will this affect prices?
The deal’s extension will push up demand from major importers and consequently lead to stronger domestic demand from Ukrainian exporters. So, domestic prices will likely grow. Increasing supply from Ukraine will pull down global prices.
However, it nevertheless should be kept in mind that importers will likely wait for a certain period after the beginning of the “grain deal’s” new term, though this period will not be as long as it was in August.
2. How will this affect exports?
The temporary absence of Russia’s representatives during the inspections showed that these inspections can be accelerated. This suggests that the rate of port capacity utilization could be raised. Provided the “grain corridor” continues to operate successfully and in case of further gradual liberation of Kherson region, Mykolaiv and Ochakiv could be added to the list of the ports operating under the deal.
At the same time, the workload of railway transport remains high. While, for example, some 200 grain railcars per day crossed the border in March, this number reached 560-580 during the port blockade in July and then lowered to roughly 500-520 railcars in September after the rise in sea exports.
3. How will logistics change?
The gains in Ukrainian exports thanks to the grain corridor were as follows:
Unless the Mykolaiv region ports are added to this agreement, exports through the grain corridor in the coming months will end up around 4-4.5 M mt. The exact forecasts will strongly depend on the pace of vessel inspections.
During Russia’s short-term withdrawal from the deal, the Joint Coordination Center in Istanbul accelerated inspections, giving hope for an increase in exports in November compared to previous months. But after Russia had resumed its participation in the inspections, the vessel queues resumed as well.
So, now the maximum export potential under this scenario is 7-8 M mt of agricultural products, which is to satisfy the market and solve the problem of exporting carryovers from the previous marketing year.
4. How will it affect the agricultural sector as a whole?
Uninterrupted shipping by sea will allow Ukraine to maintain the gained pace of agricultural exports and, consequently, its farmers will be able to earn money for 2023 spring planting.
In addition, agricultural exports generate the inflow of foreign currency into the country and thereby help stabilize the exchange rate and the overall economic situation.
Pessimistic scenario: the “grain deal” will be terminated due to any factor (the 120 days will expire with no extension of the deal, the port infrastructure will get shelled etc.)
1. How will this affect prices?
The termination of the deal will cause a rise in world prices and a fall in domestic. However, these movements will not be so significant as at the end of February because a more or less established system of exports through the land borders and small Danube ports is already in place.
2. How will this affect exports?
The monthly volume of grain and oilseed exports will shrink to at most 3.5 M mt, provided the energy system is functioning normally. If the impossibility to export by sea gets aggravated by further shelling of critical infrastructure, monthly shipments will continue to decrease.
3. How will logistics change?
If for any reason the deal is not extended, Ukraine will have the following routes left:
Exports by rail and road through the western borders
Exports through the small Danube ports
Ukraine has significantly improved the alternative ways of exporting agricultural products since the beginning of Russia’s full-scale aggression. Below are only the latest projects:
Nibulon’s Izmail terminal will supply Europe with up to 300 K mt of grain per month. The construction began in June 2022 and the first stage was completed as early as in September.
Ukrainian Danube Shipping Company has launched the “Danube Grain Route” project for delivering agricultural products by barges from a Danube river port directly to large sea vessels off Romania’s port.
Under this scenario, the maximum export potential will decrease to 3-3.5 M mt, which may entail problems with the storage of this and next year’s crops.
4. How will it affect the agricultural sector as a whole?
The share of logistics costs in the commodity price will increase again, the profit margin of farmers, which is still low, will keep falling. The foreign currency revenues will remain at a low level, and inflation in the country will continue growing. Farmers will not receive enough money for next year’s spring planting and the planted areas will reduce. The agricultural sector of the economy will shrink. It will take at least 3-5 years to restore previous production volumes.
Conclusions:
1. The grain corridor is vital to Ukraine’s agricultural sector and its economy as a whole. Very serious talks are ongoing with the participation of international partners. And, in order to slightly reduce the risks, the grain deal’s extension for as long as one year and the inclusion of the Mykolaiv ports are being discussed. The question is what Russia is bargaining for in return, and whether the parties can agree to these demands.
2. Russia’s trial withdrawal from the deal and its very quick return showed that the positions of the international community are strong and it can essentially work without Russia’s participation. However, in this case, the risks of shelling increase. This concerns not so much the ships off the ports, but rather the port infrastructure and ships at the berths. The approach of new ships for loading becomes a problem since neither ship owners, nor insurers, nor the crew themselves are often prepared for such risks.
3. The termination of the grain deal will lead to another wave of global price growth, but the market will react less and less because these risks are already so much built into the price. For example, after Russia’s short-term withdrawal from the deal, the Chicago corn price grew by 2.5%, and then fell by 2.6% after the return. At the next performance of this kind, the reaction will be even smaller.
4. Possible domestic price decrease will no more be a slump either, since the prices of major grains are already below the break-even point. Rather, it will affect the amount of corn left in the fields and spring planting. The farmer has already turned on the saving mode: to preserve the existing grain and refrain from new monetary investments, including planting.
5. Grain production will shrink to the volume needed for domestic consumption and overland export (55-60 M mt). Expensive logistics, when the cost of transportation has already equaled the cost of the product itself, will lead to an even more pronounced shift of production and processing to Ukraine’s western border. At the same time, farms in the southern and eastern regions will have to change their activity profile.
6. In western Ukraine, such regional changes will give rise to or enhance an existing trend towards setting up clusters/holdings/associations/companies, each comprising several fields of operation, i.e. cultivation, storage, processing, transportation. Similar clusters will emerge in the rest of the country, but they will be small and focused on the domestic consumer. For example, flour and butter making, bread baking, meat production and processing to meet regional demand.
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