Russian strikes on Ukraine grain renew fears over food inflation and global food insecurity

03 Aug 2023 --- Two weeks after the collapse of the Black Sea Grain Initiative, mixed messages over the outlook of commodity markets continue to cast shadows about the future of global food prices. The FAO has spoken for the first time highlighting the disruption to grain transportation will “generate instability in markets” and price spikes for key commodities.

After the Kremlin refused ro renew the deal – which had been shipping millions of tons of grain across the Black Sea to global markets to prop up food security – Russia has now adopted a new tactic of targeting key alternative export routes. 

These include routes along the Danube River. 

It is understood that almost 40,000 tons of grain destined for African countries, China and Israel were damaged in one of the most recent attacks at the Ukrainian port facilities of Izmail, very close to the Romanian border.

This comes on the heels of another attack on grain when Russia recently blew up a Ukraine grain warehouses in Odesa, destroying 60,000 metric tons of grain.

Major impact on price
All this could have a critical impact on wheat prices. Global wheat prices will likely increase if trade is being held up. 

Prices of wheat are up more than 10% since the Black Sea Grain Initiative ended. 

FAO admits that the Black Sea Grain Initiative has been “criticized” for disproportionally benefiting directly developed food-secure countries.Ukraine’s produce will continue to reach global markets, albeit at higher prices, through the European solidarity lanes. Nonetheless, land routes pose some logistical issues.

Before the war, maritime shipments through the Black Sea comprised over 90% of Ukraine’s agricultural exports, as sea routes allow for cheaper and logistically easier exports.

This week has also seen the FAO speak officially about the collapse of the deal. 

“While the FAO does not envisage any risk to the global availability of food in the short term, food access and affordability are concerning and the negative impact on the resilience of the agri-food systems should not be underestimated,” the body warns. 

Additionally, the interruption to the grain deal will “generate instability in markets” and a significant “negative effect on humanitarian aid.”

“International prices for key food commodities are likely to fluctuate depending on whether Ukraine’s exports are expected to remain on the market, in combination with the evolution of cropping conditions in other large producing countries,” FAO highlights.

Ample wheat supplies?
Russia has produced a bumper crop this season, with Putin claiming the country is capable of “replacing Ukraine grain.” 

“As the 2022-23 trade year draws to a close, Russia has solidified its standing as the world’s top wheat exporter. With record production of 92 million metric tons, Russia’s total wheat supply exceeded 100 million metric tons for the first time,” says the US Department of Agriculture in a July report.

“With ample supplies, no export restriction for the entire year and competitive prices, Russia is estimated to export 45.5 million metric tons in 2022-23. Its primary destinations are in the Middle East, North Africa and Central Asia.”

Furthermore, the USDA notes that soft international demand for wheat and continued strong global competition have led major exporter quotes to be mixed, declining in Argentina and the US, being steady in Australia and the EU and rising in Canada and Russia.Russia recently blew up a Ukraine grain warehouses in Odesa, destroying 60,000 metric tons of grain.

Nonetheless, the USDA forecasts global wheat stocks for the 2023/2024 trade season to be down to 2015/2016 levels.

Some further problems
Climate shocks such as El Niño threaten the world’s food systems this year and next, which could create supply squeezes that propel food prices.

Moreover, restrictions on free trade, such as the Indian rice export ban, can also lead to food price instability.

“Further decrease of Ukrainian agricultural products from the global market while the world is experiencing low levels of stocks (e.g., grain) poses a huge risk to global food security,” says FAO.

Ukrainian grain exports down 
While Russia’s wheat exports are forecasted to reach another record of 47.5 million metric tons in the 2023-24 season, Ukraine will struggle to export 17.5 million metric tons, its lowest crop in a decade – wheat exports are down to 10.5 million metric tons or 40% less than before the war.

“Our focus should be on the most vulnerable nations and the most vulnerable groups already suffering from food insecurity and malnutrition. This includes Ukrainian farmers who, in addition to the war, face uncertainties due to increased stockpiles, lack of storage facilities, reduced income, and potential reduction in their production of 2023-24,” explains FAO.

“The timing of the current interruption [of the Black Sea Grain Initiative] is particularly problematic since harvest has started in Ukraine and there is a need to guarantee proper income and incentives for Ukrainian farmers to prepare the next planting season during the fall.”

Moreover, after the Kakhovka dam destruction, farmers in southern Ukraine are having to deal with a water crisis and the loss of key crops.

Humanitarian crisis
FAO admits that the Black Sea Grain Initiative has been “criticized” for disproportionally benefiting directly developed food-secure countries.

“But it should be noted that the main objective of such an initiative is and should be to ensure global price and market stability, from which the poorest and the countries in need will benefit the most. Increased exports from Ukraine, even if a lower share of supply is to be exported directly to developing nations, will contribute to and meet this purpose-as it has proven to be the case, improving access to food and ensuring price and market stability,” the organization notes.

Ukraine's wheat exports are down to 10.5 million metric tons or 40% less than before the war.Only 2.4% of exports through the initiative ended in Sub-Saharan Africa, admits FAO. Some countries in the area, like the Democratic Republic of Congo, used to source over 80% of their wheat from Ukraine and Russia.

“Ukraine export destinations shifted dramatically from Asia and North Africa before the war to primarily Europe during the war, mostly due to ease of shipment and increased demand in some EU member states because of drought,” explains the USDA.

Food insecurity, meanwhile, has risen sharply, with 735 million people suffering from chronic hunger, 122 million more people compared to 2019, according to the State of Food Security and Nutrition in the World.

Renewal is the only safe path
While the world might be able to reroute Ukrainian food exports and avoid a major catastrophe and failure of international food supply chains, the more straightforward path toward global food stability is resuming Ukraine sea route trade.

“The renewal of the Black Sea Grain Initiative will contribute to dampening international prices and improve access and affordability of agricultural products for low and lower-middle-income countries. Many of these countries are already in dire macroeconomic situation, facing high levels of debt, and higher import costs or economic volatility will significantly deteriorate their capacity to support their population,” FAO explains. 

In a statement, Putin’s presidential office noted that in this week’s call with Turkish President Recep Erdogan, that Russia will return to the deal once “the West fulfills all the obligations to Russia.” Namely, the readmission of the country’s agricultural payments in the international banking SWIFT system and governments not impending Russian trade of food and fertilizers.

“To feed the rapidly growing population of the world we would need all key actors, stakeholders, agricultural producers and exporters working in close cooperation. Any disruption would only worsen the already challenging situation. The renewal of the Black Sea Grain Initiative and free mobility of food and agricultural inputs are necessary for global food security,” FAO concludes.

By Marc Cervera