Elizaveta Malyshko

The war has become a great shock for the economy of Ukraine. In March-May 2022, almost all economy of the country plunged at its worst pace with 80-90% of businesses closed and diving into the financial collapse. The Black Sea ports blockade seriously damaged the exports of agricultural and other commodities. As a result, investments in the economy declined, new projects were suspended.

But surprisingly economic activity in Ukraine was much less disrupted against expectations. The agriculture is no exception, moreover, according to the 2022 estimations, it was the agro-industrial complex that became one of the main supporters of Ukrainian economy.

Grain and Oilseed Production

The major trends of the 2022 marketing year:

• Reduction of crop areas at the expense of occupied regions and other war risks;

• Decline in crop yields, which could be attributed to insufficient fertilizer and plant protection application,  and other  technology failures for almost all crops;

• Grain production decreased  to 52 M mt, the worst harvest since 2012;

• Change in the regional crop structure. The vast areas under wheat, barley and sunflower crops are located in the occupied, and adjacent territories of high war risks. Crop area losses are only pafrtly offset by the increasing crop production in relatively safe regions;

• Delay in corn harvesting. The lack of storage facilities, frequent blackouts and power outages, the high cost of fuel led to an unusually slow pace of corn harvesting. As of the early January 2023, 22% of corn  remained in the fields. The situation was further aggravated by high carryover corn stocks. The price increase in December-January encouraged corn harvesting, and as of mid-February, about 5% of the corn area remained unharvested;

• A sharp decrease in farmers’ profitability and production margins due to production costs hike with domestic grain and oilseeds prices being stable low. The prices of fuel, fertilizers, and PPP have almost doubled in hryvnia equivalent year-to-year. However, the grain domestic price growth if any was mainly caused by the hryvnia devaluation, though input prices in the $US/Euro terms changed little;

• Logistics chains disruptions. Rising grain storage and transportation costs generated grain handling complications. 

Domestic Consumption. Processing

Traditionally, in Ukraine, the lion’s share of the gross grain production was exported, while the domestic demand did not exceed 36% over the last 5 seasons. Food consumption accounted for only 6-8%, feed - 15-18%. It is important to realize that a significant amount of feed grain is used on farm for animal feed without processing.

The flour production in Ukraine tends to decrease recently, due to reduced exports, low production profitability, changing food preferences of Ukrainians, and declining population.

During the War, the Following 

Trends Intensified:

• Some enterprises are now in the territories out of Ukraine control. About 28% of flour and about 10% of compound feed production are in the occupied or close to hostilities areas.

• Damage to property and equipment of flour producers. During the war, several large farms and food producers have been destroyed. Total direct losses of enterprise assets, including the food industry, are estimated at $9.9 B. 

 • Loss of grain and oilseeds  in damaged or warehouses out of control. Thanks to the record harvest, as of February 1, 2022 significant grain and oil crops stocks still remained in Ukraine.

• Decline in domestic grain and oil crops processing. At the beginning of the war, food and flour production reduced. To fill the gap in flour and other food supply, the second half of 2022 has already seen the recovery trend. Enterprises started working at maximum, meeting current domestic demand and making strategic stocks.

Exports

With the beginning of the war, only land crossings and small Danube ports could be used for grain export. The «Grain Deal» was signed at the end of July 2022 between Ukraine, Russia, Turkey and the UN for 120 days with the possibility of further extension. 

The main purpose of this agreement was to ensure the safe shipments from three Ukrainian ports on the Black Sea (Odesa, Chornomorsk, Pivdenny ) to reduce the deficit in the world grain market. 

On November 19,2022 the agreement was extended for 120 days. Another extension of the «Grain Deal» is expected in mid-March. The Grain Deal promoted greatly the shipment growth, but grain exports are still far from previous levels. As of mid-February 2023, Ukraine has already shipped about 80% of the estimated export volumes, but it can still supply about 2.5M mt of wheat to foreign markets.

Previously, the main buyers of Ukrainian wheat were Indonesia and Egypt. By now, the EU market is the leader in wheat imports, importing in July 2022-January 2023 almost 15 times more than in the previous season. Turkey and Algeria increased purchases compared to last season by 10% and 13%, respectively.

Corn exports rates are slower than those of wheat. As of mid-February, only half of corn potential was shipped abroad. Currently, corn stocks in Ukraine remain high, and the corn exports rates depend critically on the pace of the international inspection of the vessels in Bosphorus.

The EU countries are key importers of Ukrainian corn in the 2022/23 season. They increased purchases by 3 times compared to the last season, and the share of Ukraine in the EU imports exceeds 43% due to the attractive price compared to other origins.

In 2022, shipments to China, the second traditional buyer of Ukrainian corn, decreased essentialy. China’s share in Ukrainian corn shipments has been gradually increasing since October 2022, which indicates a sufficient confidence in the «grain corridor» functioning. However, the exports recovery is unlikely to reach the last year’s volumes.

Logistics

In March- July 2022, grain and oilseeds exports by railway played key role. With the opening of the grain corridor, the share of exports by sea increased significantly and ranged from 65 to 75% by now.

Within the Grain Deal, the grain shipments from the ports of Odesa, Chornomorsk, and Pivdenny were approved. The number of inspections is limited by the russian side. At average 2-4 vessels are checked by the inspection per day. In order to balance cargo flow, the Ukrainian side gives preference to handling of vessels with deadweight of up to 20-25 Th tons.

A sharp reduction in the grain and oilseed exports by sea and  trade flows switching to inland routes distorted the conventional logistics chains:

• The ports of the Mykolaiv cluster are actually disappeared from the export flow. Infrastructural facilities in the ports of Mykolaiv and Olbia were damaged considerably;

• The elevators loading in the western regions of Ukraine increased sharply;

• Grain delivery costs skyrocketed, delivery terms expanded;

• Huge queues of in and outbound vessels with a corresponding increase in logistics costs and drop in the prices paid to farmers;

• Storages in the ports are damaged or blocked as a result of military actions;

• With an increase in export flows across the Ukraine western border, the trend of new modern elevators construction is gaining more importance in the western part of the country.

• The share of storage in polymer big bags and modular design grainaries has increased.

• Alternative export routes are turning more and more efficient, including outlets through small Danube ports with grain transshipment in European ports. Until 2022, the Danube ports were not in demand and exported negligible volumes due to limited depths and long distances to the main grain production regions of Ukraine. Currently, even big exporters keep operation through these ports. The growth of grain and oilseed flows through the small Danube ports entailed the rapid development of the port infrastructure.

Undoubtedly, last year has totally changed all long-term trends in the Ukrainian grain sector. Decrease in production, processing, and exports pose great challenges for the agricultural sector and economy of Ukraine as a whole. But even during the war time, new projects are launched with impressive investments in the future.