Russia axes grain deal: What you need to know (Source: https://www.cnbc.com/)
Hours before the agreement’s expiry, Russia said Monday that it would not renew the U.N.-brokered Black Sea Grain Initiative.
Wheat, corn and soybean prices all rose on the news.
Simon J. Evenett, a specialist in global trade and an economics professor at the University of St. Gallen, said Monday that Russia’s withdrawal reflects the “coup de grace on a deal that was on its last legs.”
Russia’s withdrawal from a critically important wartime deal that allowed the export of Ukrainian grain across the Black Sea has reignited fears about global food security, with analysts describing the initiative’s demise as both an inevitable setback and a blow to markets.
Hours before the agreement’s expiry, Russia said Monday that it would not renew the Black Sea Grain Initiative.
The agreement, which was brokered by Turkey and the United Nations in July of last year following Moscow’s full-scale invasion of Ukraine, was a rare diplomatic breakthrough designed to avert a global food crisis.
“Today is the last day of the Grain deal,” Kremlin Dmitry Peskov said. “When the respective parts for Russia’s benefit are fulfilled, Russia will return to the deal.”
The Black Sea Grain Initiative has been repeatedly extended in short increments, amid increasing discontent from Russia over perceived restrictions that limit the full dispatch of its own grain and fertilizer exports.
Russian President Vladimir Putin reiterated these complaints over a weekend call with South African President Cyril Ramaphosa, saying — according to a Google-translated report from the Kremlin — that the key objective of supplying grain to countries in need, including those on the African continent, had not been achieved.
Wheat, corn and soybean prices all rose on the news. Wheat futures jumped 3% on Monday, hitting a high of 689.25 cents per bushel, its highest level since June 28 when the contract traded as high as 706.25 cents.
Wheat prices remain well below the peak levels of 1,177.5 cents per bushel reached in May of last year, however.
Corn futures soared to a high of 526.5 cents per bushel, while soybean futures surged to a high of 1,388.75 cents per bushel.
Bulk carriers are docked at the grain terminal of the port of Odessa, Ukraine, on April 10, 2023.
Bulk carriers are docked at the grain terminal of the port of Odessa, Ukraine, on April 10, 2023.
Bo Amstrup | Afp | Getty Images
Simon J. Evenett, a specialist in global trade and an economics professor at the University of St. Gallen, said Monday that Russia’s withdrawal reflects the “coup de grace on a deal that was on its last legs.” He cited U.N. shipping data that showed shipments have been steadily falling year to date.
“The demise of the Black Sea Deal is a blow for the nations sourcing cheaper Ukrainian wheat. So long as this doesn’t trigger lots of export bans, the deal’s demise is [a] minor disturbance,” Evenett said via email.
“Going forward what matters is whether Russia weaponizes its wheat exports,” he added. “During the last and current harvest cycle Russia was the world’s largest supplier, exporting around 45 million metric tons.”
Evenett said market participants should closely monitor the prospect of Moscow imposing an export tax increase given that this would likely raise grain prices further and help the Kremlin to finance its military campaign in Ukraine.
‘Upward pressures on food prices’
Peter Ceretti of Eurasia Group told CNBC that the political risk consultancy does not expect the deal’s suspension to trigger a fresh bout of potentially destabilizing global food inflation in the near term.
“Russian shipments of grain will continue, and the deal’s demise will not entirely halt Ukrainian shipments via the Black Sea or those through Europe, either,” Ceretti said via email.
“Going forward, however, the end of the grain deal will add to other upward pressures on food prices, such as drought in Europe and the onset of El Nino. The markets most affected by the deal’s collapse will be states in North Africa and the Levant that import large volumes of grain from the Black Sea region,” he added.
Since being signed in July last year, the U.N. says the Black Sea Grain Initiative has allowed more than 32 million metric tons of food commodities to be exported from three Ukrainian Black Sea ports — Odesa, Chornomorsk and Pivdennyi, previously known as Yuzhny — to 45 countries worldwide.
It is for this reason that U.N. Secretary-General Antonio Guterres had described the deal as playing an “indispensable role” in global food security.
Guterres said in early July that the agreement “must continue” at a time when conflict, the climate crisis, energy prices and other factors roil the production and affordability of food, while 258 million people face hunger in 58 countries worldwide.
Carlos Mera, head of agricultural commodities markets at Dutch lender Rabobank, said Monday that while investors had been bracing for a cancellation, Russia’s withdrawal was “a blow” to markets.
Mera said the initiative had supported price stability and prevented shortages across the developing world.
“Ukraine will now be forced to export most of its grains and oilseeds through its land borders and Danube ports. This will significantly drive up transportation costs and pile further pressure on Ukrainian farmers’ profits,” he added.
“The knock-on effect of this is it could prompt them to plant less next season, placing further pressure on supplies going forward.”
Ultimately, Mera said the development means low-income countries in Africa and the Middle East will likely become more dependent on Russian wheat — a country that represents more than 20% of global wheat exports.
Latin American Economies Perspective:
The end of the Black Sea Grain Initiative could have significant implications for Latin American economies, both in the short and long term. As Russia withdraws from the deal, there may be disruptions in the global food supply chain, leading to potential price fluctuations and scarcity in certain markets.
In the short term, Latin American countries that heavily rely on imported grains from the Black Sea region, such as wheat, corn, and soybeans, may face challenges in securing affordable sources of these commodities. This could impact food prices and trigger inflationary pressures in these nations, affecting consumers’ purchasing power and potentially leading to social and economic unrest.
Furthermore, the reduction in grain exports from the Black Sea could result in higher demand for Latin American produce in other parts of the world. Countries in North Africa and the Levant, which import large volumes of grain from the Black Sea region, may turn to Latin American suppliers to meet their food needs. This could present an opportunity for Latin American economies to increase their export volumes and boost their agricultural sectors.
However, in the long term, Latin American countries should closely monitor Russia’s actions regarding its wheat exports. If Russia decides to weaponize its wheat exports or impose an
export tax increase, it could further exacerbate food prices and disrupt global food security. Latin American nations should be prepared to implement strategies to mitigate potential risks and ensure food stability for their populations.
Additionally, Latin American farmers and agricultural industries may need to adapt to shifting global trade dynamics resulting from the Black Sea Grain Initiative’s demise. This could involve exploring new markets, optimizing production processes, and investing in agricultural technologies to enhance efficiency and competitiveness.
Overall, the end of the Black Sea Grain Initiative underscores the importance of diversifying food supply chains and strengthening regional agricultural capabilities in Latin America. Governments in the region should work collaboratively to ensure food security, reduce dependency on external sources, and promote sustainable agricultural practices to safeguard their economies and populations from future uncertainties in the global food market.