Russia’s blockade of the Black Sea brings dollars to Brazil

By ending the agreement to “let pass” ships with grain from Ukraine through a humanitarian corridor in the Dead Sea, Russian President Vladimir Putin this week created a new tremor in global food supplies, causing high prices and volatility in the market for agricultural commodities such as wheat and corn, of which Russia and Ukraine are major world producers.

To show he means business, Putin has ordered the bombing of grain storage structures in Ukraine’s ports and threatened to sink ships that might risk breaching the blockade.

This unfolding of the conflict puts African countries that depend on Ukrainian grains distributed by the United Nations World Food Program (70% of the total) on alert and also raises expectations that, in the short term, the price of bread may rise for the Brazilian consumer. The rise in bread is still treated as a hypothesis because wheat prices on the domestic market are around R$ 1,500 a ton, against a peak of R$ 2,300 last year. Thus, for some analysts, the crisis in Ukraine may be limited to preventing an even greater reduction in prices paid to producers when the new harvest begins, in November.

“I don’t see a very big impact that would make it go back to last year’s historical prices. Argentina, Paraguay and Brazil have good production, the southern cone is guaranteed, there is no supply problem, but price correlation. We would have to wait a little longer to be sure that this rebound will happen. I think it may not let the price drop even more, which has already adjusted a lot”, evaluates Daniel Kümmel, CEO of Moinho Arapongas and president of the Union of the Wheat Industry of Paraná.

Blocking Russian wheat would have more serious consequences

The scenario could get worse, however, if any blockade hits the Russian convoys. “Problems with Ukraine affect stocks, but if there is a problem with the flow of the Russian crop, the price can go up a lot, because the country alone represents 25% of world exports”, underlines Jonathan Pinheiro, Wheat analyst at StoneX. For him, the market has not yet fully priced in the wheat situation, and is waiting for the unfolding of the crisis in the Black Sea.

At the moment, Brazil should reap benefits in its trade balance, receiving a greater injection of dollars due to the spike in the prices of agricultural commodities. Of the second record corn harvest, which should reach close to 100 million tons, producers have already sold only 45%. The other 55% to be negotiated could yield more. In wheat, the game is open, because very little is traded before the harvest.

The stalemate in the Black Sea has already caused an increase in corn and wheat prices on the Chicago Board of Trade, close to 10% and 20% in three days. In the case of corn, it reversed a trend that would have been bearish for that time.

Crisis in the Black Sea saves prices of the Brazilian supercrop

“It is a variable that helped the Brazilian producer, since we are in a year of super harvest. The price of corn could plummet a lot, but now it opens more space for its exportation”, observes the agricultural consultant Vlamir Brandalizze. The biggest concern would be with wheat, in which Brazil is not self-sufficient, despite harvesting a record volume of 11.3 million tons in this cycle. On the other hand, Russia is the world’s biggest exporter, with almost 50 million tons, and Ukraine with another 13 million. The second largest exporter, the United States, is facing a crop failure due to dry and hot weather.

“Even wheat from Russia can be blocked there, because of the cost of freight and the risk of cargo. Russian ships themselves will have higher costs. This scenario opens the window for exporting Brazilian wheat, which normally has little liquidity”, emphasizes Brandalizze.

In an ideal scenario, Brazilian wheat would be exported over the next few months with an overprice, and when our off-season arrives, between April and July 2024, prices would have stabilized due to an eventual cooling of tensions in Ukraine and the entry of crops from Argentina and the United States.

The international price of corn had already dropped 26% this year and that of wheat, 17%. The market does not expect a return to the stratospheric prices of last year, caused both by the outbreak of war and by the severe drought in Argentina. “Last year, the crop failure in Argentina had a very strong impact on feed. This year, until a few weeks ago corn was coming to the feed industry for less than half of what it cost at last year’s peak. It will be a little more expensive, but the situation should still get much better”, evaluates Brandalizze.

Ration has already gone up, bread has not yet

As for the impact on Brazilian table prices, there are those who see this as liquid and certain. Leonardo Paz, an analyst at FGV, recalls that grains are commodities and follow international prices. “Who wins is the producer, who will sell his crop better. It is the consumer who loses, because wheat impacts the price of bread, and other grains impact animal protein, because they are food for pigs or cows, which become meat and impact the entire food chain”.

Soy-based feed has already risen from 5% to 6% and corn should arrive 10% more expensive for the industry. The transfer of costs to consumers on items such as eggs, chicken and milk, however, may not keep up with these percentages, despite the seriousness of the situation in the Black Sea. For Vlamir Brandalizze, the low purchasing power of Brazilians limits the possibility of transfers. As there is an overproduction of grains in the country, the scenario should favor exports of surplus animal protein. “Our chicken is the cheapest in the world by far. We have thighs and drumsticks at 1.2 dollars a kilo in the supermarket. We export at US$2.20 a kilo and anywhere else in the world you won’t find it for less than US$3”.

Brazil’s neutrality is questioned

Apart from short-term losses and gains, Brazil may be “wrong hand” in its reactions to Russia’s confrontation with the West. President Lula has already said that Russia and Ukraine have the same responsibility for the war, equaling the aggressor and the attacked. In this context, many countries already see Brazil as a silent supporter of Putin’s actions, from whom he increased purchases of diesel oil and fertilizers, according to Igor Lucena, doctor in International Relations member of the Portuguese Association of Political Science.

“Neutrality is said, but it is not exercised. If it were exercised in practice, we would not deny the European demand for ammunition, nor would we put Russia and Ukraine in the same point of view. In practice, we are doing what Russia wants. This hinders agreements, for example, with the European Union, because Brazil has not taken a clear position”, says Lucena.

As for Lula’s provocations to the United States, questioning the dollar as a trade currency and accusing the Americans of “encouraging war”, Lucena assesses that the statements lack responsibility. “This confrontation brings nothing but animosity, not just against the Biden administration, but against the United States in general. Imagine if a year from now we have President Trump once again in the presidency? The answer would be overwhelming, and Brazil would be isolated”, she ponders.