What Ukraine’s Declining Grain Manufacturing Means for International Meals Commerce

An aerial view of the Turkish-flagged ship “Polarnet” transporting grain from Ukraine is seen in the port of Derince, Kocaeli, Turkiye, August 8, 2022.

Omer Faruk Cebeci Anadolu Agency | Getty Images

Russia’s ongoing invasion of Ukraine is causing a global shift in trade in grain – which feeds billions of people every day – and Ukraine’s harvest this year could fall by up to 50% compared to before the war.

Both Ukraine and Russia were among the world’s top producers of commodities such as wheat and barley before war broke out in February 2022. But the conflict caused the price of US wheat and corn futures to hit a decade high (with a benchmark wheat contract hitting an all). -time high) and triggered volatility global wheat prices during the whole year. Prices stabilized in 2023 and have fallen by around 13% year to date.

“Trade flows change and fluctuate, they always have,” said Andrew Whitelaw, co-founder and director of Episode 3, an agricultural analysis firm. “Considering that about 20 years ago Russia was not a major exporter of grain… It has been grown for the last 20 years [and] Ukraine and Russia have now become the top exporters.”

And while last year’s yield and export of grains such as wheat from Ukraine was still substantial despite the war and the closure of Black Sea ports, volumes harvested and shipped this year are likely to decline.

The Black Sea Grain Initiative, a UN-brokered deal in Turkey to safely guide ships out of Ukrainian ports, was extended by just 60 days in March — a shortening from the previous 120-day period.

Whitelaw described last year’s wheat harvest in Ukraine as “pretty good” and in Russia as “absolutely fantastic,” but said Ukraine’s harvest in 2023 is likely to fall by about 20% because farmers sowed fewer crops .

“This year there are things like – in Ukraine – lack of access to finance, lack of access to fertilizer, fuel, labour, but also grain price in Ukraine is really low. So the incentive for farmers to grow it is vastly lower,” he told CNBC by phone.

“We are seeing lower acreage or land dedicated to these crops in Ukraine, meaning the greater impact of that is likely to be felt this year on supply and demand fundamentals [perspective] than last year.”

Losses in Ukraine will have to be made up elsewhere over time, including in Russia itself, but with a greater focus on the US, Canada, Brazil and Argentina.

Aakash DoshiMore

Citi Research

In fact, figures from the United Nations Food and Agriculture Organization suggest that 20-30% of the winter wheat acreage planted in Ukraine last year will not be harvested this summer due to lack of fuel availability.

Aakash Doshi, Citi Research’s head of commodities, North America, said Ukraine’s grain harvests and exports could fall by as much as 50% this year from pre-war levels.

According to figures from Citi Research, Ukraine had a record corn crop of 42 million tonnes (mmt) in 2021, and the bank estimates this will drop to 21-22 mmt in 2023/24.

For wheat, the 2021 harvest was 33 million tons, according to Citi Research, and the forecast for this year “could be 16 to 17 million tons,” Doshi told CNBC via email.

Along with crop yields, exports will also fall, he said. “Grain trade flows from Ukraine should see a volume decline, but not as much as total production as domestic consumption is weak. In 2023/24, Ukrainian grain exports (corn + wheat) could be 27-30 million tons, down 15-18 million tons from 2021/22,” he added.

A Polish farmer during a protest April 12, 2022 against Ukrainian grain imports that have lowered grain prices in Poland.

Attila Huseynov | Sopa Pictures | Light Rocket | Getty Images

There is currently a surplus of Ukrainian grain in Central European countries, leading to a rift with countries like Poland, Hungary, Bulgaria and Slovakia.

Falling prices sparked protests among Polish farmers, as well as the resignation of Polish Agriculture Minister Henryk Kowalczyk this month. On April 7, his successor, Robert Telus, said grain exports from Ukraine to Poland would be limited and halted “for the time being,” according to a Reuters report.

In the longer term, Doshi sees opportunities for grain exports from North and South America to the Middle East, North Africa and Asia, and from Australia to East Asia if harvests are good.

“In other words, Ukraine’s losses will need to be offset elsewhere over time, including by Russia itself, but with a greater focus on the exportable surpluses of the US, Canada, Brazil and Argentina,” Doshi said.

Agricultural analyst Whitelaw also said the market is likely to shift, including from Russia. “Trade flows have to change and there aren’t that many places where you can get large quantities of grain to replace the quantities that Russia had [providing]. And so it’s really because of … South American countries, the US, parts of Europe and Australia,” he said.

Global Food Trade

The war in Ukraine has contributed to rising food prices, according to the World Bank, with inflation above 5% in more than 80% of low-income countries.

But while export restrictions from Ukraine have impacted food prices, rising energy and fertilizer costs are likely to have an even bigger impact, according to a study by a University of Edinburgh team led by Peter Alexander published in February. The study suggests there could be as many as 1 million additional deaths in the Middle East, Sub-Saharan Africa and North Africa if high fertilizer prices prevail this year.

In the longer term, the picture is complex. Climate change, which is causing extreme weather, is already damaging the food system, according to Alexander, a senior lecturer at the University of Edinburgh’s Global Academy of Agriculture and Food Systems. However, how that might play out is unclear, he told CNBC: “The impact of future extreme weather… drought, heat, flooding really isn’t well understood.”

A key risk is grain production shutting down in multiple places at once, Alexander added, in what’s known as a “multiple breadbasket failure.”

“There’s definitely a possibility that we could see this type of event in the future, which could have really negative consequences for a lot of people,” he added.

In late February, UK supermarkets restricted customer purchases of certain fresh fruit and vegetables due to shortages.

Matthew Horwood | News from Getty Images | Getty Images

Factors affecting the overall price and availability of commodities and food are diverse – bad weather in Morocco and Spain was blamed for a fruit and vegetable shortage in the UK in February, but also additional paperwork due to Brexit and high energy were quoted prices.

Ways to avoid food shortages around the world aren’t easy either, according to Alexander, with many “competing narratives.” For example, locating food chains may not help.

“The reason we have a globalized food system, and the reason food has gotten cheaper and cheaper over the past few decades, is because… competitive advantages [means] We produce food where it’s easiest to produce, where it has the least input… If we start bringing everything back more local, it’s actually less efficient as a food system,” he said.

“For example, in the UK we are self-sufficient in wheat, but we are still subject to global wheat market prices,” he added.

Also, according to Alexander, higher food prices aren’t necessarily a bad thing. “Rather than trying to perpetuate artificially low food prices, or food prices that don’t reflect all costs … maybe we can make healthier, more sustainable food, we can subsidize it for everyone,” he suggested.

Reducing meat consumption in developed countries could also be an option. “We need a fairer and more efficient food system, which, from a Western perspective, very likely involves dietary change,” Alexander added.

Another debate is how much grain should be used for biofuels versus food supplies. In biofuel is grain used to produce ethanol, which is blended with gasoline to reduce emissions.

Reducing grains used to produce ethanol by 50% in the US and Europe “would offset any lost exports of Ukrainian wheat, corn, barley and rye,” according to research firm World Resources Institute in a paper published on April 1, 2022, about five weeks after Russia invaded Ukraine.

“We still have large amounts of grains around the world that aren’t used in food…in our industrial processes, ethanol, biodiesel, those types of products. I expect we’ll see more of this debate in the years to come,” Whitelaw said.

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