- Grain prices are likely to be capped in H222 following the signing of the agreement between Russia, Ukraine, Turkey and the UN on July 22 2022, which will see the resumption of grain exports from Ukraine’s Black Sea ports and the easing of the global food crisis, ceteris paribus.
- We highlight that we already expected grain prices to ease in H222 as better weather and harvests worldwide ease the supply tightness in the market, while a slowing global economy eases demand to a certain extent.
- Additionally, with a current capacity to store just 25mn tonnes of grain from the 2022/23 harvest, the deal will free up enough storage capacity for Ukraine’s full 2022/23 grains crop.
- Publicity surrounding the deal, as well as assurances from the EU and US, should also come as a boost for Russian grain and fertiliser exports.
- Despite the possibility for the Russia-Ukraine grains deal to significantly start alleviating the global food crisis, we note that a myriad of risks persist which could undermine its fruition.
Grain prices are likely to be capped in H222 following the signing of the agreement between Russia, Ukraine, Turkey, and the UN on July 22, which will see the resumption of grain exports from Ukraine’s Black Sea ports and the easing of the global food crisis, ceteris paribus. That said, we highlight that we had already expected grain prices to ease in H2 as better weather and harvests worldwide ease the supply tightness in the market, while a slowing global economy eases demand to a certain extent. At Fitch Solutions, we forecast wheat prices to average USc920/bushel in 2022, which would require prices to average USc845/bushel in H2 (prices averaged USc995/bushel in H1). We are likely to revise this downwards in the coming weeks, as better than expected harvests in key exporting regions come into the seaborne market, thus exerting downward pressure on prices, along with shipments from Ukraine if the deal comes into fruition (keeping in mind numerous risks persisting). In general, we expect grain prices to go through a period of significant price volatility due to the fragility of the agreement.
As part of the deal, vessels carrying grains would navigate through a safe corridor in the Black Sea under the direction of Ukrainian pilots, and then pass through the Bosphorus strait to reach global markets. Russian, Ukrainian and Turkish officials will inspect vessels before they arrive in Ukraine to ensure that weapons are not being smuggled into Ukraine. A Joint Coordination Centre (JCC) will be established immediately in Istanbul including representatives from Turkey, Ukraine, and Russia in order to monitor ships. Russia as well as Ukraine have agreed that there should be no attacks on any of the vessels going from those ports out of territorial waters into the Black Sea by any party. It is expected that exports of 5mnt of grain would leave the ports each month, a figure comparable to pre-war levels.
Grains prices had surged following the Russian invasion of Ukraine in February, with second-month CBOT wheat futures breaking historical records to reach a new high of USc1,363/bushel on March 8. With Ukraine representing 9.3% of global wheat exports and 12.3% of global corn exports, the Russian invasion of Ukraine exacerbated already tight global production balances. Prices started easing in mid-June as news of the Russia-Ukraine grains deal infiltrated markets and strong harvests were recorded elsewhere in major producers including the US. On July 22, the signing of the deal resulted in wheat prices falling further from USc805.3/bushel to USc756.5/bushel, representing a 6.1% one-day decline and a significant departure from its YTD average of USc984/bushel.
Similarly, corn prices fell 2.0% to USc564.3/bushel. According to Russian news agency, TASS, grains from the Russian occupied territories of Ukraine have already been subject to agreements that enables their export out of the Black Sea ports to Middle Eastern countries.
Apart from lowering prices, the deal will also ease the global food crisis by freeing Ukraine's grains storage capacity. The Russian invasion has substantially reduced Ukraine's grains storage capacity, which is typically around 65-67mn tonnes. Ukraine’s inability to export since the invasion means that its storage units still hold 20-25mn tonnes of grain from the 2021/22 harvest. Additionally, around 20% of its storage capacity now lies in Russian-occupied territory, meaning that Ukraine’s total storage capacity, as of July 22 2022, has effectively fallen to around 25mn tonnes. With Ukraine expecting a grains harvest of about 50mn tonnes, the resumption of Ukrainian exports will alleviate concerns amongst grains producers that they will not have enough storage capacity. With Ukraine's summer harvest already underway (the Agricultural Ministry reported that the first 1mn tonne of grain production, 2% of total, has already been harvested), we expect that the target of 120 days to export Ukraine’s current stocks will be sufficient to allow enough storage for Ukraine’s recent harvest. However, we highlight that delays or disputes that could result in the temporary cessation of Black Sea trade will increase fears of a storage concern for the 2022/23 harvest.
Also noteworthy is that the Russian invasion of Ukraine has significantly impacted agricultural input costs, with the price of Potash remaining elevated at USD562.5/tonne, representing a y-o-y increase of 177.8%. According to Russian officials, fertiliser and grain exports have been hurt by international sanctions despite being subjected to exemptions. Private freight companies, banks and insurers have avoided involvement with Russian exports for fear of being accused of breaching sanctions. We expect that the publicity surrounding the deal and a concerted effort from US and EU officials to clarify sanction exemptions will boost Russian fertiliser and grain exports. We also highlight that there are suggestions that Russia has sought to use the negotiations to force the removal of exemptions on Belarussian fertiliser, which currently accounts for 17.6% of global Potash production. Still, sanctions remain on Belarus at this stage, and fertiliser supply levels are likely to remain constrained.
Russia And Ukraine Account For Nearly 30% Of Global Wheat Exports
Global - Share Of Wheat Exports, %
Despite possibilities of the Russia-Ukraine grains deal working to significantly start alleviating the global food crisis, we note various risks to its fruition. Firstly, to export out of the Black Sea ports, private shipping companies will be required to go into mined water in an area where no ceasefire currently exists. Secondly, the grains presently sit in a warzone, highlighted by Russia’s decision to bomb the port of Odessa the day after signing the agreement. Actions such as these pose a significant threat to potential grain exports, either by making exporting operations too dangerous or by triggering a further breakdown in talks between the two countries. Indeed, Russian foreign minister Sergei Lavrov stated in late July that Moscow's war aims now extend beyond the eastern Donbas region, and that the Kremlin is still seeking regime change in Kyiv. These comments pose downside risks to our core view that fighting will wind down to a de facto stalemate later in 2022. Therefore, while we expect grain prices to be capped going forward, we highlight upside risks to prices given the fragility of any agreement between Russia and Ukraine.
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