Christina Serebryakova
Head of Analytical Department & Agricultural Commodities Broker
Atria Brokers

Ten-month Russian invasion cut Ukrainian wheat presence on the export market twice. Before the war, in 2021/22 MY, Ukraine accounted for about 12% of the global wheat export. In the current 2022/23 MY, this share will decrease to 6% provided that the “grain corridor” functions properly. At the same time, the aggressor country is poised to raise its share in the world trade pie 2022/23 by 3% to 20%, while the other 6 major exporters will gain only 1% y/y – to 60%. All problems of Ukrainian export together with the sharp decrease of country’s grain supply impact the world market. Operators keep their eyes on all news about the functioning of the “corridor”. Any concerns about the future pace of Ukrainian shipments support the global prices, while a prolongation of the “grain corridor” on November 17 until March 17 has eased the tension.

“LAYCAN AT JCC”

Let’s remember the magic freight phrases from the previous two years. In Covid times it was “vessel in hands”. After the start of the Russian war in Ukraine, the next phrase came to market: “5 days Sulina clause” (which means 5 free days, while the rest to count as demurrage), “no Sulina” (vessel from Danube).  Then, the “grain corridor” came, which is definitely a silver lining for Ukrainian shipments, but it is not functioning as smoothly as one could hope. Russian inspectors, working as a part of Join Coordination Committee (JCC) in Istanbul for inspection of ships moving to/from Ukraine, are slowing down the procedures of vessels checking. In such a way, new phrase is present now among the deep-sea port exporters: “Laycan at JCC”. It means the arrival of the vessel to the Bosphorus for inspection in order to enter Chornomorsk/Odessa/Yuzhny. After arrival vessel can spend there 1-2-3 weeks and even over one month like it was with Allseeds’ vessel.

As a result, a huge number of ships is waiting on the Bosporus, and the supply of Ukrainian grain to the world market does not meet its potential. For example, as of 18 December 2022, 92 ships were waiting for inspection in Turkey, according to the Ministry of Infrastructure of Ukraine. “The queue is growing because of Russia-made restrictions on inspections. On 18 December 2022, Russia registered only 3 ships out of 65 declared. This leads to a lack of export at about 3 MMT per month”, the Ministry says. 

BLACKOUTS

Starting from 10 October 2022, Russia makes a constant shelling of Ukrainian electricity infrastructure. It results in the suspension of the operation of Ukrainian seaports. One of such day was 11 December 2022, when Ukrainian Sea Ports Administration informed that Russia’s attacks on energy infrastructure had completely cut off power to critical infrastructure facilities. The functioning of the ports of Odessa and Yuzhny was suspended, and the port of Chornomorsk was operating partially. The ports were returned to full-scale work the next day.

UZ AND EU RAILWAY PLANS CONFIRMATIONS

Land transportation of grain is also problematic. Currently, sizably larger volumes of grain are moving by railways and roads compared to the pre-war level.  For the first 4 months of the war, in March-June 2021/22 MY, Ukraine exported only 560 KMT of wheat by sea, down from 2.9 MMT over the same period of 2020/21 MY. In turn, export transportation of wheat by rail amounted to 70.6 KMT, while there was no rail export in March-June 2020/21 MY. Export by truck totaled 7.1 KMT over this period, up from 1.7 KMT from the year-ago level. 

Since the start of 2022/23 MY, in July-November, Ukraine shipped 5.5 MMT of wheat by sea, down almost 2.7 times compared to the same period of 2021/22 MY (14.78 MMT). At the same time, Ukraine continued developing land routes for wheat supply and the results are notable. Rail transportation of wheat for export amounted to 787.0 KMT in July-November 2022/23 MY compared to only 0.4 KMT over the same months of 2021/22 MY. Export by trucks increased to 494.7 KMT, up from 4.8 KMT a year ago.

Such an increase in volumes transported by land has generated many problems. We see the lack of rail fleet and vehicles and massive queues of wagons and trucks on the land border checkpoints. For example, as of 23 November 2022, about 19,100 wagons were heading to the western land border checkpoints of Ukraine compared with about 15,000 as of mid-October. All destinations via land borders were overloaded for December 2022, and for some period of time, exporters considered only Izov (Poland) and Batiovo (Hungary) as possible ways for rail export.

Railway border checkpoints are used at half of their capacity. According to deputy commercial director of Ukrzaliznytsia (UZ) Valeriy Tkachev, the main problem is that the transport system of the EU cannot handle extra 120-130 MMT of all types of Ukrainian export cargoes that used to be shipped via ports. He also notes that the throughput capacity of railways of neighboring European countries does not allow to transport of these extra volumes from Ukraine due to the lack of fleet, infrastructural restrictions of the rail network. At the same time, V. Tkachev pointed out the notable progress in the development of border checkpoints and transshipment terminals that let to increase monthly grain export via railways checkpoints by 5 times from 220 KMT in March 2022 to 1023 KMT in November. 

Moreover, transportation tariffs increased significantly. “The use of freight wagons is a highly competitive market. The price is formed by the market. If the number of people willing to transport grain is higher than the infrastructure capacity, then the cost of transporting grain begins to rise due to the increase in the cost of using a wagon (the wagon component of the tariff). In addition, a grain hopper is a seasonal type of rolling stock, the demand for which increases sharply in August-November and drastically decreases in April-June. Therefore, we see price fluctuations during the year. At the same time, the transportation tariff, which UZ receives for transporting grain over a distance of 650-710 km, remains unchanged at $11-12/MT. This is a state-regulated tariff, by the way, it is 3-5 times lower than the tariff for cargo transportation by EU railways”, V. Tkachev commented. We should also note, that further also such costs are included, as station fees, wagon rent, seals, etc.

Getting confirmation of plans by exporters from Ukrzaliznytsia and by EU importers from their railways is also a tricky issue. There were wagons, which waited in the queue for over 3 months. Even when the waiting time was smaller, some sellers were anyway out of the contract period, which was followed by lots of rejections from buyers. Also, such wagons become “hostages of borders” and created a lack of transport for grains, thus traders were forced to use cement carriers, mineral carriers, and half wagons.

UKRAINE MORE THAN HALVED WHEAT EXPORT SO FAR IN 2022/23 MY

Generally, Ukraine exported 18.1 MMT of grain in July-November 2022/23 MY, down from 26.6 MMT in the same period of 2021/22 MY. Particularly, wheat shipments more than halved to 6.76 MMT compared with 14.75 MMT a year ago.

Further prospects of Ukrainian grain export will depend on the functioning of the “grain corridor”, which remains a key channel for the supply of Ukrainian food to the global market. 

According to the USDA, the export potential of Ukrainian wheat is forecast at only 12.5 MMT in the 2022/23 season (18.8 MMT in 2021/22 MY), the lowest since 2014/15 MY. For comparison, the Ukrainian Grain Association is a bit more optimistic at 13 MMT.

LOST DESTINATIONS OF UKRAINIAN WHEAT EXPORT

If we accumulate the trade data by the IGC, European Commission, Ukrainian and Russian official statistics, we can see how severe the decrease of Ukrainian share in the markets of the major world wheat importers is. Supplies to such important buyers as Egypt, Indonesia, Bangladesh, Tunisia, Saudi Arabia, etc. decreased significantly. Moreover, there were no shipments to Pakistan, Morocco, Philippines. Amid a sharp drop in the supply of Ukrainian wheat, the countries of North Africa increased purchases of European and Russian grain. In turn, the Asian importers cover large share of their demand with Australian wheat.  

Before the war, in July-February 2021/22 MY, Ukraine was the second largest supplier of wheat to Egypt after Russia with the share at 32%. Ukraine exported 2.8 MMT of grain to the north African importer. The export from Russia amounted to 3.7 MMT (43%). The EU shipped 1.9 MMT of wheat (22%). Now, Ukraine lost a huge part of the market of the largest wheat importer. In July-September 2022/23 MY, Ukraine’s share decreased to about 5% (135 KMT), while Russia’s presence on the Egyptian market increased to 59% (1.5 MMT), and that of the EU grew to 33% (838 MMT).

The presence of Ukraine in the market of other countries of North Africa suffered as well. It was the biggest supplier of wheat to Tunisia in July-February 2021/22 MY (52%; 634 KMT), followed by the EU (44%; 534 KMT). These two origins covered almost the entire Tunisian demand for wheat. The Ukrainian share decreased to 12% (63 KMT) in July-September 2022/23 MY, while the share of the EU amounted to 82% (417 KMT). Russia accounted for 6% of the Tunisian market (28 KMT), while there were no shipments from Russia in the whole 2021/22 MY. 

Ukraine did not export wheat to Morocco and Libya in July-September 2022/23 MY. Morocco covered its demand with European (82%; 1.2 MMT), Canadian (14%; 209 KMT) and US (4%; 62 KMT) origins. The share of Ukraine was 22% (597 KMT) in July-February 2021/22 MY, and other suppliers were the EU (38%; 1 MMT), Argentina (26%; 727 KMT) and Canada (14%; 387 KMT). Russia became the largest supplier of wheat to Libya (66%; 275 KMT), and the share of the EU amounted to 34% (140 KMT) for three months of 2022/23 MY. In July-February 2021/22 MY, Ukraine was the main source of wheat for Libya (46%; 400 KMT), while the presence of Russia and the EU was at 41% (358 KMT) and 12% (106 KMT) correspondingly.  

Ukraine did not export wheat to Nigeria in July-September 2022/23 MY, and the market was dominated by the EU (68%; 1.2 MMT) and the US (23%; 383 KMT). The share of Russian origin decreased to 1%. In July-February 2021/22 MY, Ukraine accounted for 6% of wheat supplies to Nigeria (259 KMT). The EU accounted for 34% (1.5 MMT), the US – 24% (1.1 MMT), Russia – 16% (712 KMT), Canada – 11 % (503 KMT), and Argentina – 8% (361 KMT).

Ukraine dominated the market of Ethiopia in July-February 2021/22 MY, with the share at 38% (467 KMT), followed by the US (29%; 351 KMT), Russia (14%; 167 KMT), Argentina (10%; 126 KMT) and the EU (9%; 116 KMT). Ukraine’s share decreased to 5% in July-September 2022/23 MY, while the presence of the EU increased to 73% (426 KMT). At the same time, the positions of Russia and the US weakened as well to 9% (53 KMT) and 13% (76 KMT).

Ukraine was also the main origin for Pakistani wheat imports prior to the war. In July-February 2021/22 MY, the share of Ukraine was 69% (1.4 MMT) in this market, followed by the EU – 17% (337 KMT) and Russia – 8% (167 KMT). The shares of Argentina and Australia were 3% each. For three months of 2022/23 MY, the market of Pakistan was dominated by the EU (72%; 490 KMT) and Russia (28%; 187 KMT), while there were no shipments from Ukraine. 

Ukraine was the largest supplier of wheat to Indonesia in July-February 2021/22 MY with the share at 37% (2.7 MMT), followed by Australia – 35% (2.5 MMT), Argentina – 16% (1.2 MMT), Canada – 10% (0.7 MMT). In July-September 2022/23 MY, the share of Ukraine was virtually 0% here. At the same time, the share of Australian origin amounted to 61%, and Canadian to 19%. There was also sizable growth in the presence of the EU and the US, whose shares increased to 8% and 12% correspondingly from 2% and 1% before the war in July-February 2021/22 MY.

Ukraine managed to keep its share high in the market of Bangladesh, however, some decline was still observed. Ukrainian wheat accounted for 35% (677 KMT) of this market in July-February 2021/22 MY, followed by Canada (21%; 403 KMT), Australia (18%; 360 KMT), Russia (16%; 307 KMT), Argentina (9%; 180 KMT). For three months of 2022/23 MY, the Ukrainian share totaled 32%. At the same time, European wheat entered the Bangladeshi market and occupied 22% of it (111 KMT). Canada turned into the largest supplier (44%; 219 KMT), while the share of Russia decreased to 1% (7 KMT). 

Ukraine did not ship wheat to the markets of other large Asian importers in July-September 2022/23 MY. In turn, Australia, US and Canada strengthened their positions in the market of Thailand, Vietnam, the Philippines and South Korea.

GAINED MARKETS

There are no many gains for Ukrainian export after the war started. Speaking about destinations for Ukrainian wheat, we can see that Turkey is the main beneficiary. Acting as an intermediary for the “grain deal”, the country seems to be the only one among the former largest importers of Ukrainian wheat, who managed to increase purchases. 

In July-November 2022/23 MY, Turkey imported more than 1.4 MMT of Ukrainian wheat, up from 1.27 MMT a year ago, and became the leading buyer. We should note somewhat higher shipments to Algeria – 154.2 KMT, up from 135.6 KMT in July-November 2021/22 MY. 

Ukrainian wheat export to Europe increased by almost 14 times per year and totaled 3.38 MMT during July-November 2022/23. Most part of it 34% went to Romania, and 13% - to Poland, in order to be further re-exported to final destinations via ports of these countries.

Except abovementioned strong shipments of wheat to Turkey, Romania, and Poland, we can point larger supplies of corn and sunflower seed to the EU. 

Before the war, in October-February 2021/22 MY, Ukraine supplied 5.85 MMT of corn to the EU, up from 4.8 MMT over the same period of 2020/21 MY. After the beginning of the full-scale Russia’s invasion, Ukraine managed to raise supplies of corn to the EU to 6.9 MMT in March-September 2021/22, up from 3.3 MMT a year ago. Land transportation made it possible to spur supplies. Almost 4.1 MMT were exported by rail and trucks in March-September 2021/22, while the year ago this volume was 31.3 KMT only. In October-November 2022/23, Ukraine already shipped 3.3 MMT of corn to the EU, up from 1.4 MMT over the same period of 2021/22 MY.

Supplies of Ukrainian sunflower seed to the EU jumped to a record high after the war started, as European buyers revealed high demand for oilseed raw material after facing problems with obtaining Ukrainian processed products. In March-August 2021/22, Ukraine shipped 1.19 MMT of sunflower seed to Europe, up from only 7.5 KMT over the same period of 2020/21 MY. Before the war, the supplies were quite limited at 17.1 KMT in September-February 2021/22 vs. 116.8 KMT a year ago. The export remains high in 2022/23 MY with 733.6 KMT of sunflower seed already supplied to the EU in September-November, up from 9.9 KMT a year ago.

WHEAT PRICES REACHED PRE-WAR LEVELS

Ukraine always has an influence on the global grain market. Since Russia’s war started, the Ukrainian factor gained more importance. Despite the facts that the market has already priced the war factor and the current indicators are even lower than the year ago, all events concerning the “grain corridor”, escalations of military activity, etc. are closely monitored and have their effect on the grain prices in the global arena. 

Today, when the “grain agreement” is prolonged for another 4 months until 17 March 2023, it helps to stabilize the grain prices on the world market and improve global food security. 

However, any future obstacles to the smooth operation of the “corridor” may create new uncertainty not only for Ukraine but for the world market in general. Moreover, as there is no evidence of a soon end of the war, the factor of next season’s production and export prospects in Ukraine will become more significant, especially when we get alarming news about Argentina’s wheat production and the poor condition of the US winter wheat. 

Despite competitive prices of Ukrainian wheat, importers do not hurry up to book it in expectation of lower prices. Besides, Turkish buyers ask for additional discounts for Ukrainian grain of about 10 USD/MT less for Ukrainian wheat than for Russian origin, as the Russian one shows better quality parameters – higher test weight, falling number, and “W” parameter. 

GLOOMY PROSPECTS OF 2023 CROP: WEATHER, CROP CONDITIONS TO BE WATCHED

By the end of November, Ukrainian farmers planted winter grains on 4.5 MLN HA, or 94% of the forecast area. Particularly, winter wheat, which traditionally accounts for a lion’s share of the overall production, was planted on 3.8 MLN HA (94%). In 2021, the planted area under winter wheat amounted to 6.7 MLN HA in Ukraine.

In early December, the National Academy of Agrarian Science of Ukraine informed that a catastrophically small share of winter crops was planted at the optimal time. Thus, the wintering may be really difficult for the grain of the 2023 harvest, especially if we consider the high prices of mineral fertilizers, crop protection products, fuel, logistics, etc. At the end of December 2022, the Ukrainian Agribusiness Club (UCAB) released its forecast for wheat crop 2023 at 13.5 MMT, - 30% y/y. Barley production 2023 is forecast to shrink to 3.7 MMT, - 35% y/y, and corn crop 2023 to drop to 15.8 MMT vs. 27 MMT forecast for 22/23 MY. At the same time, sunflower seed harvest is forecast to increase by 30% y/y to 13.5 MMT.

Thus, the production prospects for the next season look quite gloomy. Ukraine usually produces much more grain than it needs for domestic consumption. Local usage is about 8 MMT per year for corn, 9-10 MMT for wheat, and about 4 MMT for barley. The first crop harvested in war conditions still left sizable amounts for export. However, the export potential of 2023/24 MY may be significantly lower compared to 2022/23 MY that will provide additional pressure on global food security and will have its influence on the prices.