Why the end of the Russia-Ukraine grain deal affects global food prices – 07/17/2023 – Market

The announcement that Russia will not renew its participation in a deal that allowed Ukrainians to export grain through the Black Sea could have an impact on global food prices.

That’s because Ukraine is one of the world’s biggest exporters of sunflower, corn, wheat and barley. The prices of these products have already risen this Monday (17), after the announcement of the end of the agreement.

The pact allowed Ukrainian cargo ships to pass through the Black Sea from the ports of Odesa, Chornomorsk and Yuzhny/Pivdennyi. Thanks to the arrangement, more than 32 million tons of Ukrainian food reached world markets.

Ukraine will now need to find alternative routes for its exports.

At the start of the war in February 2022, Russia’s blockade caused some 20 million tonnes of grain to be stranded in Black Sea ports. Low supply amid high demand has sent world food prices soaring — and it could happen again.

When the agreement was signed and grain shipments resumed, world food prices fell by around 20%, according to the UN Food and Agriculture Agency (FAO).

Another risk of the end of the agreement is the possible shortage of food in several African and Middle Eastern countries, which depend on the import of Ukrainian grain.

Last week, Shashwat Saraf, regional emergency director for East Africa at the IRC, in a statement called on those involved to extend the agreement longer-term to create “predictability and stability” for the region, which has lost huge amounts of of harvests because of drought and floods.

“With approximately 80% of East Africa’s grain being exported from Russia and Ukraine, more than 50 million people in East Africa are starving and food prices have skyrocketed by nearly 40% this year,” Saraf said.

Russian Complaints

Kremlin spokesman Dmitri Peskov said the pact came to a “de facto” end on Monday.

But Moscow said it would return to the pact if its conditions were met.

Russian President Vladimir Putin says parts of the deal allowing the export of Russian food and fertilizer have not been honoured. He also claims that Ukrainian grain was not supplied to poorer countries, which was a condition of the pact.

Russia also says Western sanctions are restricting its own agricultural exports. Putin has repeatedly threatened to withdraw from the deal.

The country’s foreign ministry reiterated those complaints on Monday, accusing the West of “open sabotage” and “selfishly” putting the trade interests of the deal ahead of its humanitarian goals.

But Turkish President Recep Tayyip Erdogan told reporters he believed Putin “wants to continue the agreement” and that they would discuss renewing the pact when they meet in person next month.

Turkey participated in negotiating the agreement, as did the UN.

What was the grain deal?

When Russia invaded Ukraine in February 2022, its navy blocked the country’s ports on the Black Sea.

The grain deal with Ukraine allowed cargo ships to pass safely along a Black Sea corridor 310 nautical miles long and three nautical miles wide. The corridor provided access to the Ukrainian ports of Odesa, Chornomorsk and Yuzhny/Pivdennyi.

The pact also allowed the Russian navy to search ships for weapons in the Bosphorus Strait at the entrance to the Black Sea.

What are Ukraine’s plans?

Ukrainian President Volodymir Zelensky said his country intends to continue exporting grains, noting that the agreement was made up of two agreements that mirror each other — one signed by Ukraine and the other by Russia.

“We are not afraid,” he said of Russia’s decision to withdraw from the deal.

“We were approached by companies that own ships and are willing to continue shipping grain if Ukraine agrees to let them in and Turkey agrees to pass them.”

Nikolai Gorbachev, president of the Ukrainian Grain Association, told the BBC that its members had identified alternative means of exporting grain — including through its ports on the Danube River.

But he conceded that the ports would be less efficient, reducing the amount of grain Ukraine can export and increasing the cost of moving it.

Western leaders were quick to condemn the decision, with EU Commission President Ursula von der Leyen accusing Russia of a “cynical action”, adding that Brussels was trying to “ensure food security for the world’s vulnerable”.

US Ambassador to the United Nations Linda Thomas-Greenfield described the move as an “act of cruelty”.

The Kremlin’s announcement came just hours after Ukraine claimed responsibility for an attack on a bridge in Crimea that killed two civilians.

Peskov said Russia letting the deal expire was unrelated to the attack. “Before this attack, the position was declared by President Putin,” he told reporters in Moscow.

When the UN negotiated the deal, it told Russia the pact would help boost its grain and fertilizer exports.

While Western countries have not imposed any sanctions on Russia’s agricultural products, Moscow says Western sanctions have dissuaded shipping companies, international banks and insurers from doing business with its producers.

Russia has asked that its state-owned agricultural bank, Rosselkhozbank, be reconnected to the Swift fast payment system (from which all Russian banks were barred in June 2022).

The UN suggested Russia set up a subsidiary of the bank, which would be allowed to use Swift – but Russia turned down that option, saying it would take too long.

Other suggested schemes, such as processing food and fertilizer payments through US bank JPMorgan Chase, or through the African Export-Import Bank, also failed.

What other export routes are there for Ukrainian grain?

The European Union (EU) has a plan to distribute Ukrainian grain that cannot be shipped across the Black Sea.

It says the food can be transported across Ukraine’s border with Poland and taken to ports on the Baltic Sea, or by train and barge to the Romanian port of Constanta.

Since the start of the war, Ukraine has shipped about 10% of its grain exports across its land border with Poland. However, traffic jams are likely to occur if you export more grain via this route.

Ukraine’s railways have different measurements than the rest of Europe, which means that each train loaded with grain must be transferred from one set of cars to another at the border.

Furthermore, the rail network in Eastern Europe does not have the capacity to transport to the Baltic ports and Constanta even the relatively low volumes of grain that Ukraine has been exporting overland until now.

Most of this grain remained in eastern European countries such as Poland, Hungary, Romania, Bulgaria and Slovakia rather than being transported further afield. This amount saturates local markets and causes food prices to fall in these countries.

To protect farmers’ incomes in these countries, the EU has agreed to restrict Ukraine’s food exports until 15 September.

Where did Ukraine’s food exports go?

The UN says that of all the food products Ukraine exported under the grain deal last year:

• 47% went to “high-income countries”, including Spain, Italy and the Netherlands
• 26% went to “upper-middle-income countries” such as Turkey and China
• 27% went to “low and lower-middle-income countries” such as Egypt, Kenya and Sudan

The UN says that under the grain deal, Ukraine has sent 625,000 tonnes of food as humanitarian aid to Afghanistan, Ethiopia, Kenya, Somalia, Sudan and Yemen.

In 2022, more than half of the grain purchased by the UN World Food Program came from Ukraine.

This text was originally published here.