By Joseph Glauber, Brian Mcnamara, and Elsa Olivetti
On July 17, Russia announced that it was terminating participation in the Black Sea Grain Initiative, which allowed exports of grains and other agricultural products from Ukrainian ports.
The deal, put in place almost a year before, was scheduled for its fourth renewal. Within hours of the announcement, Russia launched a missile attack on the port of Odesa. The following day, Russian missile attacks on key Ukraine grain handling facilities sent wheat futures prices to their largest one-day rise since February 2022. A cargo insurer operating under the agreement reportedly suspended its coverage of Ukraine Black Sea grain shipments.
The suspension drew international dismay. United Nations Secretary-General António Guterres said halting the grain exports, including food assistance shipments, “will strike a blow to people in need everywhere.” A top Kenyan official called it a “stab in the back.” Meanwhile, Russia justified the action complaining that related discussions on reopening the Tolyatti-Pivdennyi ammonia pipeline and allowing Russian agricultural banks to use the SWIFT banking system to finance food and fertilizer purchases by developing countries had stalled.
Since the agreement took effect on July 22, 2022, Ukraine has exported almost 33 million metric tons of wheat, maize and other agricultural products. That has helped to keep Ukraine’s agricultural economy afloat in the midst of war. At the same time, much of the exports have gone to developing countries, and overall the deal has contributed to a decline in agricultural prices that has benefited consumers around the world. How will Ukraine and the rest of the world cope now that the deal appears to be over?
History of the agreement
The Black Sea Grain Initiative (BSGI), a UN-brokered agreement between Russia and Ukraine, allowed Ukraine to partially resume the exports of grains and other agricultural products through Black Sea shipping routes that had been blocked since the Russian invasion on February 24, 2022. The agreement granted Ukraine safe passage for export ships from three crucial Black Sea ports—Odesa, Chornomorsk, and Pivdennyi—which accounted for approximately 37% of all Ukrainian agricultural exports prior to the invasion. The agreement has established a vital path for food from a critical global supplier. The deal also provided Russia with assurances that its own food and fertilizer exports would not be blocked from global markets, an important aspect given Russia's significant role as a major exporter of wheat and fertilizers.
The initial agreement had a 120-day term, and as it came up for renewals Russia frequently threatened to pull out if its demands were not met. On October 29, 2022, Russia suspended its participation, but then re-entered the initiative four days later, on November 2. On November 18, Russia and Ukraine agreed to a 120-day extension. The deal was then again extended on March 17, 2023, but this time for only 60 days. On May 18, the deal got another 60-day extension, until July 17—at which point Russia terminated it.
Russia’s objections included assertions that the Western sanctions on its banking system constitute damaging “hidden” restrictions to its exempted food and fertilizer exports. Russia has also repeatedly asserted that the renewal of the BGSI would be conditional on the re-opening of the Tolyatti pipeline, crucial for Russian ammonia exports. However, the pipeline has been out of operation since the beginning of the war and was damaged on June 5, intensifying Russia’s objections to the deal.
Ukraine’s agricultural exports under the BSGI
The agreement helped to bring total monthly agricultural exports to near pre-war levels. The 33 million tons of agricultural goods exported under the agreement augmented the roughly 2.5 to 3.5 million tons of agricultural products exported monthly through the so-called Solidarity Lanes (overland routes through Eastern Europe).
On a tonnage basis, maize and wheat have accounted for roughly 78% of total agricultural products exported through the BSGI (Figure 1). The exports have allowed Ukraine to move harvested grain to markets, freeing up storage space that had been at near capacity when the country was unable to ship through the Black Sea.
Figure 1
Under the BSGI, about 65% of wheat was exported to developing countries (Figure 2a). This includes 725,167 tons of wheat exported through the World Food Programme to help relieve hunger in Afghanistan, Djibouti, Ethiopia, Kenya, Somalia, Sudan, and Yemen. By contrast, about 83% of maize exports under the BSGI have gone to developed countries and China (Figure 2b). These countries import maize as animal feed and are traditional buyers of Ukraine maize. While some have criticized exporting disproportionately to developed countries and China, a large emerging economy, increased exports from Ukraine have contributed to lower global prices, which benefits all buyers.
Figure 2a
Figure 2b
Implications for Ukraine and the world
The termination of the agreement initially had a negligible impact on commodity markets. Futures prices jumped after the announcement, but by the end of the day were trading below the previous day’s level. One reason is that the announcement was not a surprise, as Russia had signaled its intentions for weeks. But the larger factor is that supplies have been ample and prices low over the past several months. Global production of wheat and feed grains, including maize, is projected to be marginally higher in 2023 than in 2022 and should be sufficient to meet global demand without a significant drawdown in inventories, even absent supplies from Ukraine. Prices for wheat and maize have largely traded below pre-war levels since mid-2022.
The biggest impacts from the end of the BSGI will be felt in Ukraine, at least in the short term. The deal helped Ukraine work through its exportable inventories that had built up during the first five months of the war. But the high cost of transport, particularly through the Solidarity Lanes, meant that Ukraine farmers received substantially lower grain prices than competitors, which in addition to the war itself, has reduced plantings. The U.S. Department of Agriculture (USDA) projects Ukraine production for 2023 wheat, maize, and barley crops to be down 43% in aggregate from 2021 levels. Projected exports for 2023/24 compared to 2021/22 are down 28% for maize, 44% for wheat, and 68% for barley (Figure 3).
Figure 3
With Black Sea routes closed again, Ukraine will have to find alternative, and likely far more costly ways, to export its grain. In recent months, grain exports through the Solidarity Lanes have totaled as much as 2.5 million tons, but it is unlikely that they could absorb much more in the short run, and certainly not the additional 3 million tons typically exported in recent months through the Black Sea. Moreover, increased overland exports would likely exacerbate tensions with Ukraine’s Eastern European neighbors. While the European Union has reached an agreement with Ukraine not to sell its grain in those markets, their exports still compete for trucks, railcars, barges, and port facilities—raising transportation costs for all producers in the region.
Unless a low-cost alternative is found to ship Ukraine grain, the end of the BSGI will lead to lower prices for the country’s producers, likely resulting in lower production for 2024 wheat and maize crops. The impact is akin to Ukraine experiencing back-to-back droughts and would greatly diminish its role as a major wheat and maize supplier. The reduced production also poses risks for global markets; with global grain stocks at low levels and little rebuilding this current year, prices will remain volatile and responsive to potential production shortfalls. Thus a diminished Ukraine leaves a smaller buffer if major global producers fall short.
Conclusions
The Black Sea Grain Initiative offered Ukraine a crucial safety valve for its war-torn agricultural sector, and some relief from supply constraints for world markets. Exports in 2022 were below 2021 levels, but far higher than many had feared at the outset of the war. But even with the BSGI in place, the war has had a devastating impact on Ukraine agriculture and additional export costs have contributed to reduced production. With the Black Sea now closed again, export costs will be even higher. Russia’s recent attacks on port facilities and grain infrastructure raises concerns that war-related disruptions may extend beyond closure of the Black Sea and could affect exports through other corridors. That would have significant impacts on global grain availability in the short run, and further disrupt Ukraine’s ability to grow and export grain in the long run.
Joseph Glauber is a Senior Research Fellow with IFPRI's Markets, Trade and Institutions (MTI) Unit; Brian McNamara is an MTI Program Coordinator; Elsa Olivetti is an MTI Research Assistant. Opinions are the authors'.
**This blog was originally posted on July 20, 2023, by IFPRI.
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