Grain exports back in Russia’s sights in Ukraine war

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The collapse of the Black Sea grain deal and Russian strikes on Ukrainian infrastructure have renewed the threat to the world’s food security from disrupted supplies, as Moscow pushes for a greater share of global grain exports.

Russia and Ukraine have targeted one another’s commodity exports infrastructure since the Kremlin in July pulled out of a UN-brokered deal enabling exports of Ukrainian grain through the Black Sea, leading traders to fear that further disruption will hit supplies.

Russian forces have carried out missile strikes against Ukrainian grain terminals and threatened to target all ships travelling across the Black Sea to its ports, while Kyiv has launched drone strikes against a Russian naval vessel and an oil tanker.

This escalation “heightens risk and triggers uncertainty”, said Arif Husain, chief economist at the UN World Food Programme.

“A single mis-step by either party will have disastrous consequences simply because there is no immediate substitute for all the grain exported by Russia and Ukraine from the Black Sea,” he said.

Blocking Ukraine’s ability to export wheat, barley, corn and other grains opens up an opportunity for Moscow to seize greater share of the global grain market, analysts said. The war has pushed up prices, apparently for the long term, allowing the Kremlin to make up for some of the lost revenue due to western economic sanctions.

Already the world’s largest wheat exporter, Russia produced a record grain harvest in 2022-23, generating 23 per cent more volume than it had on average in the previous five years. It is expected to produce slightly less in the coming year, but still a bumper crop.

This is likely to give Moscow just shy of 60mn tonnes to export this crop year and next — far more than usual, according to figures from S&P Global Commodity Insights.

“Moscow is seeing an opportunity where if you take the Ukrainian share off the market, there’s a lot more share for Russia to take,” said Anthony Rizzo, agriculture and fertiliser analyst at consultancy CRU. A significant amount of the record harvest is sitting in storage and needs to be exported to “make room” for the next harvest, he added.

“I see it as a play for them to not only weaken Ukraine’s financing [through fewer grain exports], but also to boost their own.”

President Vladimir Putin said Russia would supply free grain to some African nations, a region that had counted on Ukraine for supplies, days after the deal fell apart.

The collapse of the grain deal comes as the global food system faces turmoil ranging from India banning exports of non-basmati white rice to record olive oil prices.

While the largest importers of Ukrainian grain by sea include China and Spain, the nations worst affected are likely to be developing countries in Africa and the Middle East, which have relied on the country for a greater proportion of supplies and may struggle to access other sources at higher prices.

The Black Sea grain initiative had allowed about 33mn metric tonnes of crops to be exported by sea from Ukraine since August last year, equivalent to 8 per cent of all global corn and wheat exports in the 2021-22 crop year. Almost 60 per cent went to developing countries and China, according to the co-ordination committee monitoring its implementation.

Ukraine also exported an additional 35mn tonnes of agricultural products via more expensive alternative routes using road, rail and river barges since last June, S&P said, up from minimal levels before the war.

The critical benchmark for wheat jumped 20 per cent after Russia quit the grain deal but has returned to $6.39 per bushel, about the same as before the deal’s collapse. Prices are now well below the levels of February to June last year, when they surged above $10 per bushel following Russia’s full-scale invasion, but they remain a third higher than typical levels in pre-conflict years.

Paul Hughes, chief agricultural economist at S&P Global, said the war would have a greater impact on Ukrainian production levels than the collapse of the Black Sea deal, curbing the quantities available for export close to the volumes that left the country by alternative routes last year.

“When it comes to Ukraine’s total volume of exports, we don’t see the export corridor deal being a limiting factor. The limiting factor is going to be Ukraine’s production as a country under siege,” he said.

Yet those alternative transport routes also look increasingly under threat. Russia’s early August attack on a port on the Danube river has damaged infrastructure there, while it may prove politically challenging to increase shipments via rail and road through eastern European countries.

“We now know that we can’t necessarily rely on Ukraine” for grain supplies from the Black Sea, said Kona Haque, head of research at ED&F Man, the agricultural trading house.

Grain prices will remain high and “will spike up every time you see another vessel being downed, or another attack on the ports . . . [the region] is too vital for the grain market to ignore”, Haque said.

Ukraine’s infrastructure ministry declined to comment on its grain export strategy, but President Volodymyr Zelenskyy’s press service said the future of the grain deal was discussed at length in a recent meeting with senior officials and generals.

The collapse of the grain initiative “is a substantial shock to the Ukrainian farmers”, said Michael Magdovitz, senior commodity analyst at Rabobank. He said the grain deal had given Ukrainian farmers the confidence to plant “significant quantities” of goods last year, but now with the initiative gone, they have limited options to sell the produce.

“Next year Ukrainian farmers will plant far less, given the circumstances,” Magdovitz added. “How that will affect the international market remains to be seen, but it should elevate the long-term floor for prices because you are removing a cheap supplier from the market.”

Additional reporting by Anastasia Stognei