With the November 19 deadline fast approaching, a deal to extend the Black Sea grain corridor was finally reached on Thursday of last week. All parties have reportedly agreed to renew the Black Sea Grain Initiative for another 120 days with no significant concessions granted to either Ukraine or Russia.
The renewal of the deal is great news for global food security, facilitating the safe navigation of grain and fertiliser out of the Black Sea to the international market. It will relieve the pressure on grain prices worldwide, which is very welcome news for the global consumer, particularly in developing nations.
The latest agreement comes after Russia abruptly withdrew from the initiative in late October following a drone attack on its Black Sea fleet in the port of Sevastopol, only to re-join the United Nations administered deal four days later. Moscow’s humiliating backdown came two days after a large convoy of vessels moved a record amount of grain through the corridor in defiance of Russia’s warnings that it would be unsafe to do so without its participation.
The Black Sea Grain Initiative specifically allows for the export of grain and other agricultural products from three key Ukrainian ports on the Black Sea – Odesa, Chornomorsk and Yuzhny, which have a combined export capacity of around three million metric tonne per month. Ukraine canvassed the inclusion of other ports, especially Mykolaiv, which shipped 35 per cent of Ukraine’s food exports before the war, but that was not agreed upon in last week’s negotiations. Ukraine had also pushed for a one-year extension to the deal instead of four months.
Russia lobbied hard for the removal of some Western sanctions and the easing of restrictions on state-owned agriculture lender Rosselkhozbank (Russian Agricultural Bank) to help facilitate grain exports, but the concessions were not forthcoming. The Kremlin also called for the release of Russian fertiliser stuck in European ports and warehouses and a resumption of ammonia exports, an essential ingredient in fertiliser, via a pipeline to the Black Sea. Neither request was conceded, but Moscow said it would continue negotiations on those matters.
Since the corridor opened in July, more than 450 vessels have shipped almost 11.2 million metric tonne of Ukrainian agricultural products to global consumers. This includes 4.54MMT of corn and 3.24MMT of wheat, collectively more than 70 per cent of total exports. Other commodities shipped comprise 830,000 metric tonne of rapeseed, 756,000MT of sunflower oil, 655,000MT of sunflower meal, 516,000MT of barley and 218,000MT of soybeans.
The most significant destination by volume was Spain at just over 2MMT in total, 44.4 per cent of which was corn, 37 per cent wheat and 12.4 per cent barley. Turkey was the second biggest importer of Ukraine grain at almost 1.5MMT, with wheat making up 39.9 per cent, corn 33.1 per cent and sunflower oil 11 per cent. Third on the list was China at 1.3MMT, with corn, sunflower meal and sunflower oil the major contributors at 40.9, 37.1 and 10.6 per cent, respectively. Italy was next at a tad over 1MMT, followed by The Netherlands at 765,000MT. Of the developing nations, Egypt imported 429,000MT, Bangladesh imported 269,000MT and Libya 229,000MT.
In addition to the Black Sea export corridor, Ukraine has been frantically developing alternate routes to international markets to increase agricultural exports and serve as a critical backstop in case the war escalates and/or the corridor deal breaks down. Grain has been moving by truck and train across its western border with Poland, and with the assistance of river barges, through Danube River ports in Romania.
However, the capacity on those routes is currently around 2.7MMT per month compared to the pre-war Black Sea port shipping capacity of more than 6MMT. Nevertheless, volumes have been increasing as efficiency improves, with 7.1MMT exported via road, rail and river barge in the three months to September 30 compared to 4.25MMT in the four months to June 30. Exports via river barge to Romania have nearly doubled, rising from 2.55MMT in the March to June period to 4.7MMT in the July to September period, far exceeding the increases in road and rail volumes.
Transporting grain via rail from Ukraine to neighbouring Poland is a very slow and expensive exercise. The rail gauges are different – Ukraine is the same as Russia – which means grain has to be transferred to European gauge rail cars at the border. There are exceptionally cumbersome border controls, inadequate reloading equipment, limited border storage, insufficient rail fleet capacity, and the pace of rail cargo traffic in Ukraine is relatively slow.
The wheat market was sold off as soon as the corridor extension news surfaced. December wheat futures fell as much as 2.9 per cent in Chicago trade, and the nearby Matif wheat futures contract also dropped to its lowest intraday level since August 26 before an unexpected late rally saw it finish €4.75 higher than the previous day’s close. Chicago corn felt the wheat pressure early but rallied into the close to end the day slightly higher than the Wednesday close.
Offers of 11.5 per cent protein Ukrainian wheat remerged on Friday at sharply lower levels. Feed wheat offers into Italy and Spain were quoted US$10 lower on a cost, insurance and freight basis. Ukrainian wheat offers had been pretty scarce in recent times as the trade awaited clarity on the corridor’s future beyond the November 19 deadline.
A decline in grain shipments from Ukraine has played a significant role in the global food price crisis this year, but there are many other vital drivers. The ongoing repercussions of the COVID-19 pandemic and the climate shocks which continue to challenge global agricultural production, most recently droughts in Argentina, the United States, China and parts of Europe and severe flooding in Pakistan, have been very influential.
The Black Sea grain corridor has led to a partial recovery in shipments from Ukraine, but they remain well below pre-invasion levels. And they cannot fully recover while the war rages on and Russia continues to occupy Ukrainian territory. However, it will probably see as much as 3MMT of wheat exports added to both the Russian and Ukrainian forecasts, bringing estimates up to 45MMT and 14MMT, respectively. Corn will also be a significant beneficiary, with Ukrainian exports over 20MMT in the October to September marketing year probable, and 25MMT quite possible should current price relativities remain in play and further corridor extensions ensue in 2023.
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