Dennis Voznesenski
Senior Agriculture Analyst
Rabobank

“Grain will continue flowing out of Ukraine in the short term, but it will be more costly to move and may take longer. Crops that cannot be sourced from Ukraine will need to be sourced from other origins, and this could likely come at a higher cost. In the longer term, reduced profitability for Ukranian farmers is likely to reduce production in Ukraine and reduce global export availability.”

Russia's decision to suspend its participation in the deal allowing Ukraine to ship grain through Black Sea ports has sent shockwaves through the global grain market and reignited concerns about food security worldwide. The exit from the Black Sea Grain Initiative, which played a crucial role in mitigating a global food crisis, has raised the specter of heightened food prices and insecurity once again. 

Since the withdrawal, Russia's actions have further escalated tensions in the Black Sea region. Critical Black Sea ports, including Odesa, which served as essential gateways for exporting Ukrainian grain and agricultural products, now face strikes. The Russian Ministry of Defense's statement that any ship bound for Ukraine might be carrying military cargo has also cast uncertainty over commercial ships in the region, raising concerns that they could be targeted.

The fallout from Russia's withdrawal and the escalating situation in the Black Sea pose significant challenges to the stability of the global grain market and food security efforts. The international community is closely monitoring the developments, as the potential repercussions on food prices and access to essential food supplies loom large on the horizon.

In an exclusive interview with Dennis Voznesenski, Senior Agriculture Analyst at Rabobank, we delve into the potential consequences of Russia's exit and the escalating situation in the Black Sea. Dennis provides valuable insights into the impact on global wheat prices, international grain trade, food prices, and food security efforts in vulnerable regions.

While Ukraine still has alternative options for grain exports via rail, road and the Danube River system, higher freight costs are anticipated. Dennis highlighted that "grain will continue to flow out of Ukraine in the short term, but it will be more expensive to move and may take longer". He underlined that "the longer term impact of no grain deal and reduced Ukrainian production is what the market will have to assess going forward". Reduced profitability for Ukrainian farmers may lead to decreased production, which can impact global export availability and food security efforts in vulnerable regions. 

How do you assess the impact of Russia's decision to exit the grain deal on global wheat prices and the grain markets in general? What consequences do you foresee for the international grain trade?

There was a fast and sharp upward price impact in the first days following the grain corridor not being renewed. Half of the market was panicking, while the other half of the market was hoping this was a negotiation tactic from Russia to gain more sanction exemptions. Hopes of renewal appeared dashed following attacks on Ukranian grain export facilities.

The months preceding the non-renewal saw anywhere between 30-50% of Ukraine’s agricultural exports head through the grain corridor under the Black Sea Grain Initiative. The removal of the corridor is important, particularly in terms of the immediate impact on export flows. However, export avenues over rail, road and through the Danube River system have had their export capacity heavily invested into since the war began. Assuming nothing impacts these three alternative avenues for export, Ukraine will likely be able to move a large proportion of this coming season's crop production. However, it is important to note that there will be an increased freight cost associated compared to using the deep sea ports utilized under the Black Sea Grain Initiative. 

FREIGHT COST HIKE AND REDUCED FARM-GATE PRICES

The recent escalation in military tensions and Russia’s threats to commercial ships in the Black Sea have caused immediate price spikes in wheat. Do you expect these spikes to have a long-term effect on food prices, and how do you think this situation will unfold in the coming weeks?

The increased freight cost of moving grain to western Ukraine for export will mean reduced pricing received at farm-gate by Ukranian farmers, reduced profit margins, and likely as a consequence, reduced planting for coming crop seasons. This will eventually lead to reduced exportable surplus globally and higher prices. For now, Ukraine still has a lot of grain to export and avenues to do so through. The longer-term implication of no grain deal and reduced Ukranian production is what needs to be assessed by the market moving forward.

The grain deal allowed Ukraine to export grain through the Black Sea and helped alleviate the global food crisis. With Russia pulling out of the deal, what alternative options do you see for Ukraine to continue its grain exports? What are the challenges and opportunities associated with these alternative routes, and how might they impact the grain market dynamics in the region?

 There are three alternatives to the grain corridor: 1) truck and rail Ukranian crops over the border into the EU or 2) move it through neighboring countries and their seaports e.g. via barges on the Danube down to the port of Constanta in Romania or by rail and truck to northern Poland’s export ports,  and 3) export through Ukranians Danube ports.

Ukranian truck and rail exports run into the challenge of dealing with politics in Eastern Europe. Prices in Eastern Europe for grains and oilseeds have declined by more than in the rest of the world, with locals putting the blame partially on Ukranian grain imports. Pressure on Eastern European politicians to stem the flow of Ukranian crops has been considerable. For now, there is a ban on wheat, maize, rapeseed and sunflower to be imported into Poland, Bulgaria, Hungary, Slovakia and Romania, but crops are allowed to be exported through their ports. Now with harvest in full swing in Eastern Europe and Ukraine, it will be important to watch the political dynamics, especially: Will Eastern European countries impose any additional restrictions on Ukranian grain movement?

The second alternative avenue of export, which started to reportedly account for just over a third of Ukraine’s export ability in the months leading up to the grain corridor non-renewal, is barging it on the Danube river system through Romania. The port of Constanta has handled a large volume of Ukrainian crops for exports.

Lastly, also along the shores of Ukraine’s Danube, we have seen that companies have installed capacity to load handysize vessels for exports to the world market. Reports are of considerable investment being made in the Danube River system. The challenges or risks for this export avenue are two-fold. Firstly, it is less prone to but not immune to Russian attacks. Secondly, the volume of shipments will partially be determined by the size of vessels that can come up to the loading facilities, and this could be influenced by water levels. If seasonal conditions in Europe dry up and water levels recede, export flows could decline via the Danube.