Since Russia’s invasion of Ukraine in February 2022, the pattern of sanctions and blockades has often seemed like the West versus Russia. As a result, the news of recent restrictions imposed by the EU Commission on Ukraine exporting grains to 5 EU member states may appear surprising. In this week’s blog, we will look into the reasons behind this legislation and how it might affect grain markets in the near future.
Background to the Restrictions
The five EU member countries affected by the restrictions on Ukrainian imports are Poland, Slovakia, Bulgaria, Hungary and Romania, while the specific commodities related to the deal are corn, wheat, rapeseed and sunflower seed. Of the aforementioned nations, all but Romania had recently implemented their own measures to reduce or prevent grains being imported from Ukraine, however these individual acts have since been waived as part of the agreement overseen by the EU Commission.
The primary reason for the bans implemented by the eastern European countries was to protect their domestic farmers. Ukraine is a grain-producing powerhouse, being within the top five global exporters of wheat, corn and rapeseed in 2021 and being a significant producer of sunflower seed as well. The majority of these commodities were previously exported via the numerous port cities on the Black Sea, however since Russia’s invasion last year, Ukraine has had to find new ways to deliver its produce to international markets.
The change in export routes for Ukrainian grains that has resulted from the ongoing conflict has been stark. Taking Poland as an example, the country “received 2.08 million tonnes of corn, 579,315 tonnes of wheat and 44,114 tonnes of barley in 2022” from Ukraine versus “6,269 tonnes of corn and 3,033 tonnes of wheat” and no barley in the previous year, according to Reuters. The staggering difference, which has flooded domestic markets throughout eastern Europe with Ukraine’s exported grains, has put the region’s farmers under severe price pressure when selling their own crops.
The picture is not quite as simple as too much grain in eastern Europe. One of the side-effects of Ukraine’s exports being rerouted through its neighbouring countries has been the increased cost of land freight throughout the region. Railcars and lorries which would have previously been used to shift grain throughout the region have been co-opted by the efforts to export Ukraine’s crops. This issue was compounded by the hesitancy of many eastern European farmers to sell their crops during the high prices of 2022. Adrian Wawrzyniak, spokesman for the Polish Trade Union of Individual Farmers, was quoted by Reuters as saying many farmers in the region had hoarded crops on the expectation that prices would continue to rally. The subsequent decline in global benchmarks, with CME Chicago Wheat prices now as low as in July 2021, means many of these farmers lost out on potential profits last year.
The restrictions imposed by the EU Commission are only scheduled to run from 2nd May to 5th June, but there is plenty of opportunity for further disruption to grain markets before we reach its deadline. Notably, the Black Sea grain corridor deal is set to expire on 18th May. The deal was previously extended by 2 months in March, and the Turkish Foreign Minister recently stated that he thinks the deal could be extended for at least another 2 months. Representatives from the relevant states have descended on Istanbul for talks to resolve the situation, but it remains unclear if Russia will back down from its stated demands in return for maintaining the safe passage. Ultimately, if the grain corridor deal collapses in the next week, the tensions around Ukrainian grains in eastern Europe will rumble on as the options to export crops from Ukraine will be restricted to its western land borders.
Finally, it is also worth noting that there will be a dramatic decrease in grain production in Ukraine this year, which may alleviate the tension in the medium term. While some crop-growing regions have been abandoned due to the conflict, other parts of the country have faced connected challenges such as higher costs and less availability of fertiliser, fuel and labour. CNBC reported quotes from Aakash Doshi, who is head of commodities, North America at Citi Research, that “Ukrainian grain harvests and exports this year could be down as much as 50% on pre-war levels.” Such a decline could resolve the pressure in eastern European grain markets, however given Ukraine’s prominence as a grain exporter, it could simultaneously push food prices around the world. While these outcomes remain hypothetical at this stage, it is certainly worth monitoring how this situation unfolds in the coming weeks.