On Monday, the deal which had allowed Ukraine to export commodities via a protected shipping corridor in the Black Sea expired as Russia withdrew its participation in the scheme. Wheat prices have climbed significantly in the days since, so in this week’s blog, we will look at the developments that have led to the collapse of the grain corridor deal and what may happen next.
Unresolved Demands and Heightened Risk
The grain corridor deal was originally agreed last summer for 120 days and has since been extended on three occasions, including as recently as May 2023. The more recent extensions, however, have not come without speculation about the potential for Russian withdrawal from the agreement. This speculation has stemmed from reports of Russia’s demands for ongoing participation in the grain corridor deal, which include the “reconnection of Russian Agricultural Bank (Rosselkhozbank) to the SWIFT payment system”, amongst others, according to Reuters. Given the widespread sanctions enforced on the country following the invasion of Ukraine last year, however, it has seemed unlikely that the U.N. would agree to the requests made by Russia.
With the grain corridor agreement no longer in place, the Black Sea region has become considerably more vulnerable overnight. Indeed, this was emphasised by Russian drone attacks on the key Ukrainian ports of Odessa and Chornomorsk, both of which had been included in the grain deal. BBC News reported that 60,000 tonnes of grain, along with vital port infrastructure, had been destroyed in the attacks. While the damage from such attacks on port cities will create significant logistical obstacles in exporting grain, the vulnerability of ships on the water may be the more influential factor in reducing the flow of exports from the region.
It has been suggested that Ukraine, Turkey and the U.N. could press on with exporting commodities through the Black Sea without Russian participation. This would, however, rely heavily on the appetite of maritime insurance companies. As reported by Reuters, ships navigating the grain corridor have been subject to “additional war risk insurance premiums, which are charged when entering the Black Sea area, need to be renewed every seven days.” Without Russia’s approval of the shipping lane, these premiums will rise and may become unaffordable for some companies. There is also a high chance that many shipowners will be reluctant to let their vessels pass through the Black Sea region. Finally, with the potential for Russia to lace the sea with mines, there may be too many risks for either shipowners or insurance brokers to countenance.
What Next?
As far as commodity prices are concerned, price rises will be expected across the grains complex. During trading on Wednesday, Chicago Wheat and Paris Matif Wheat both saw prices for front-month contracts rise by over 8%, marking the biggest daily jump in prices since the early days of the conflict. Compared to 1 week ago, prices for both indices are up by over 10%. Whether the extreme highs in grain prices witnessed in the months following Russia’s invasion of Ukraine last year will be replicated remains to be seen. However, after a year in which many nations around the world have struggled with food price inflation, a renewed cost surge in food supply chains could lead to extreme hardship in certain regions. As is often the case, it will be the poorest countries that bear the worst consequences of higher global food prices. To that end, the East Africa Director for the U.N.’s World Food Programme, Michael Dunford, was quoted as saying that the collapse of the grain corridor deal will “exacerbate what is already a terrible situation.”
While the danger of moving grain out via Ukraine’s ports is assessed, an immediate pathway for exports is through the nation’s neighbouring countries. These exports through the eastern EU have previously brought their own distinct challenges, ranging from logistical issues due to differing railway gauges to more political obstacles. As noted by Reuters, the flood of Ukrainian grain into eastern EU countries caused unrest among farmers who claimed it had “undercut local supplies and been purchased by mills, leaving them without a market for their crops.” This issue led to EU-approved bans being imposed by Bulgaria, Hungary, Romania, Poland and Slovakia on domestic sales of Ukrainian grain which are due to be phased out in September.
The collapsed grain deal and attempts to resolve it represent an evolving situation, and it would be difficult to make any long-term predictions at how markets may develop. Within ChAI’s platform, the Freight data for grain exports from Ukraine will, of course, be a driver to key an eye on in the coming weeks. Alongside that, COT reports will provide useful insight into how the speculative community will react to the situation. As the graph above shows, there has been a net-short position for Non-Commercials on Chicago Wheat futures since early July 2022, but this has narrowed significantly in recent weeks. With the potential for another extended price rally, it provides an opportunity for bullish speculators to build long positions and potentially boost wheat prices higher still.
