March 5, 2024

Why the Black Sea cereal deal with extinction is important

An agreement allowing Ukraine to export grain through the Black Sea will expire at the end of Monday after Russia said it would suspend its participation.

The agreement, made last July by the United Nations and Turkey, was intended to ease a global food crisis by allowing the safe export of Ukrainian grain that had been blocked by the conflict between Russia and Ukraine.

Why is the market important?

Ukraine is a major producer of grain and oilseeds and the disruption to its exports when the war broke out sent world food prices to record highs. The deal, agreed in July 2022 about five months after the war began, helped reduce prices and ease a global food crisis.

Ukrainian grain also played a direct role with 725,200 tons, or 2.2 percent, of supplies sent through the corridor used by the United Nations World Food Program (WFP) to aid countries such as Ethiopia, Somalia and Yemen.

What does this mean for food prices?

Grain and oilseed prices have already risen in response to the news that Russia will suspend its participation in the market. The increase in staple foods, such as bread and pasta, will lead to higher prices in the coming months if the market does not restart soon.

However, the situation is better than it was in the months after the war started because supplies of grain from other producers such as Brazil and Brazil have increased.

Prices for wheat, the main ingredient in bread, have fallen about 14 percent so far this year and corn is down about 23 percent.

The current global food crisis, however, is far from over. The WFP said last month that multiple emergencies had overlapped, creating the largest and most complex hunger and humanitarian crisis in more than 70 years.

In 2022, a record 349 million people were acutely hungry, and 772,000 were teetering on the brink of famine, the WFP said in an annual review.

What is the state of global food supplies?

World corn stocks started the 2021/22 season at a six-year low, so Russia’s invasion of Ukraine, one of the world’s top corn exporters, led to a sharp rise in prices.

However, a sharp increase in exports from Brazil has helped boost supplies with almost 17 million tonnes of corn being exported through the corridor.

The US Department of Agriculture (USDA) has predicted that global corn stocks by the end of the 2023/24 season will be at a five-year high.

Global wheat stocks are tighter and are expected to be at an eight-year low at the end of the 2023/24 season, USDA data show.

What has been exported under the deal so far?

Under the agreement to create a safe shipping channel, Ukraine was able to export 32.9 million tons of agricultural products, including 16.9 million tons of corn and 8.9 million tons of wheat.

Before the conflict, Ukraine was exporting about 25 to 30 million tons of corn per year, mainly via the Black Sea, and 16 to 21 million tons of wheat.

The capacity to send grain through the Black Sea under the agreement is limited by the inclusion of only three ports.

Why is Russia withdrawing from the agreement?

Russia has repeatedly said it sees no reason to extend the deal. He says promises made to remove obstacles to Russian food and fertilizer exports have not been fulfilled. Moscow’s demands included the reconnection of the Russian Agricultural Bank (Rosselkhozbank) to the SWIFT global payment system.

Other demands include resuming supplies of agricultural machinery and parts, lifting restrictions on insurance and reinsurance, restarting the Togliatti-Odesa ammonia pipeline and unblocking the assets and accounts of Russian companies involved in food and fertilizer exports.

Can the Black Sea grain corridor work without Russia?

Ukrainian ports were blocked until the agreement was reached in July last year and it is unclear whether it will be possible to send grain now that Russia is withdrawing from the agreement.

Additional war risk insurance premiums, charged for entry into the Black Sea area, would rise and ship owners may be reluctant to allow their vessels to enter the war zone without Russia’s agreement.

Insurance industry sources say coverage arrangements can change quickly. War risk insurance policies must be renewed every seven days for ships, costing tens of thousands of dollars.

Is the corridor necessary if the Ukrainian harvest decreases?

Ukraine’s grain exports are forecast to fall in the 2023/24 season after the war farmers planted less corn and wheat.

The US Department of Agriculture has forecast corn exports to fall to 19.5 million tonnes, down from 28 million the previous season and well below the record 30.3 million shipped in the 2018/19 season when they accounted for 17 percent first of world trade.

Wheat exports are expected to fall to 10.5 million tonnes, down from 16.8 million the previous season and well below the peak of 21 million in 2019/20 which accounted for 11 percent of world trade.

However, exporting even those lower amounts of grain through the eastern European Union would be logistically difficult and expensive, especially for crops grown in the eastern regions of Ukraine which have a long and difficult journey just to reach the border. out.

Can Ukraine export more grain through the EU?

Ukraine has been exporting significant amounts of grain through eastern EU countries since the conflict began. However, there were many logistical challenges, including different rail gauges.

Another issue is that the flow of Ukrainian grain through the eastern EU at all is causing unrest among farmers in the region who say local supplies are suffering and mills have bought them, leaving them with no market for their crops. .

As a result the EU has allowed five countries – Bulgaria, Hungary, Poland, Romania and Slovakia – to ban the domestic sale of Ukrainian wheat, corn, rapeseed and sunflower seeds, while allowing transport for export elsewhere. As it currently stands this will be phased out by mid-September. A larger harvest is also expected in the east of the EU this summer and major ports such as Constanta in Romania are expected to struggle to handle the amount of grain they are likely to receive, leading to congestion and shipping delays.

What will it mean for the World Food Programme?

The WFP buys several million tonnes of food commodities each year of which about 75 percent are cereals.

In 2021, WFP purchases amounted to 4.4 million tons with Ukraine as the top source, providing 20 percent of the total.

Ukraine mainly supplies wheat and split peas. Most of the food goes to Africa along with some countries in West Asia such as Yemen so the WFP usually gets most of its supplies from eastern Europe, which is closer than major producers in North America or South.

The WFP has sent 725,200 metric tonnes through the corridor. It will have to look elsewhere, potentially at a higher cost when a funding shortfall has already forced it to scale back operations in several countries.

Reuters

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