Grain of discontent: view from Ukraine

Igor Burakovsky, Head of the Board, Institute for Economic Research and Policy Consulting

Stanislav Yukhymenko, Research Fellow, Institute for Economic Research and Policy Consulting

Traditionally, Ukraine has taken leading positions in world grain production and international grain trade. Russian aggression seriously affected the Ukrainian economy and agriculture in particular. Among other problems, Ukraine faces the challenge of finding alternative routes to export grain. The authors describe the Ukrainian view on the impact of war on Ukrainian grain export and export-related problems and their policy implications. They see current grain conflict as a pure trade dispute and enumerate technical measures how to jointly solve it. At the same they found that the grain conflict revealed a number of deeper political and economic problems such as national differences in assessing, how Russian aggression against Ukraine affects national economies in general and its specific sectors, challenge of future Ukraine EU membership for EU CAP, military dimension of “grain solidarity” with Ukraine.  

Traditionally, Ukraine has taken leading positions in world grain production and international grain trade. (See Table 1).

Table 1.  Ukraine Agricultural Production and Exports (2021/22 MY).

Source: Ukraine Agricultural Production and Trade. Foreign Agricultural Service U.S. DEPARTMENT OF AGRICULTURE, April 2022, https://www.fas.usda.gov/sites/default/files/2022-04/Ukraine-Factsheet-April2022.pdf

Prior to the war, Ukraine’s agriculture produced 10% of GDP, employed 14 percent of the labor force, and generated 41 percent of total exports.[1]

Russian aggression has not only resulted in tremendous human tragedy and the very existence of the Ukrainian nation as such, and seriously affected the Ukrainian economy and agriculture in particular.

Ukraine lost a part of its agricultural land, machinery, equipment, processing, and storage facilities due to occupation, and military actions. As of February 24, 2023, the war has resulted in total damage of 8.72 billion USD for the agriculture sector (destruction of machinery and equipment, storage facilities, livestock, fisheries etc), while the aggregate losses total 31.50 billion USD (foregone farm income due to lower/forgone production volume, lower farm gate prices (due to export logistic disruptions), higher additional farm production costs.[2]

Ukraine and its allies have faced the challenge of developing new logistic routes to ensure necessary supplies and export of agricultural products.

Ukraine in close cooperation with allies managed to sustain grain export by establishing alternative routes (Solidarity Lanes initiative). Development of alternative routes required combined efforts of EU, «roadside» countries and Ukraine. To finance Solidarity lanes EU has mobilized 1 billion euro to increase global food security and provide a lifeline for Ukraine’s economy.

Solidarity lanes has played so far crucial role in exports of Ukrainian agricultural goods, and become only viable option for non-agricultural exports from Ukraine and has turned out to be the only way for Ukraine to import all the goods it needs.

Combination of Solidarity lanes and Black Sea Grain Initiative has allowed Ukraine to export significant amount of grain and other agricultural products. Back Sea Grain Initiative ensured safe export of close to 33 million metric tons of grain from Ukrainian Black Sea ports to 45 countries, aboard more than 1,000 outbound vessels.[3]

It has allowed the World Food Programme to transport more than 725,000 metric tons of wheat in support of food assistance operations in Afghanistan, Djibouti, Ethiopia, Kenya, Somalia, Sudan and Yemen, the countries now impacted by recent decisions.

In general, there is an agreement that Istanbul arrangements as of 22nd of July 2022 contributed to sustained and essential reductions in global food prices thus stabilizing the situation on the international markets.

In fact, Russia’s actions against Ukraine in the Black Sea in addition to the pure military aims, also have an economic purpose to destroy the Ukrainian economy in general and undermine its position on international grain markets. These actions include the Black Sea blockade (destroying maritime logistic routes); attacking Black Sea port infrastructure; and simply stealing Ukrainian grain from occupied territories. Recently Russia intensified attacking Ukrainian ports on the Danube River to disrupt new logistics schemes replacing the Black Sea Grain Initiative.

These actions immediately resulted in decreasing export volumes; loss of private and budget revenues; diminishing currency proceeds and shortage of storage facilities. The damage to machinery and equipment was the largest source of total damage (53%), followed by stolen inputs and outputs (23%) and damaged storage facilities (15%). The largest loss, accounting for 46% of the total losses, resulted from the decrease in farm gate prices of export-oriented commodities such as wheat, barley, corn, and sunflower seeds.[4]

If the problems aggravate, Ukraine will face the problem of losing export markets; increasing Russian attempts to conquer the Ukrainian segments of international grain markets. In fact, we are talking about weakening Ukraine’s economic potential as such.

Russia’s approach towards resuming the Black Sea Grain Deal is straightforward. First and foremost, the Black Sea is not only about the grain: it is a military, political, and economic challenge with global implications. Therefore, Russia has been trying to trade easing foreign sanctions against Russia for the resuming the Black Sea grain corridor. Russia has been determined to find any possibility either to ease or circumvent sanctions and attract as many intermediaries as possible to dilute the unanimity of international solidarity with Ukraine and form various pro-Russian coalitions.

At the same time, the establishment of Solidarity Lanes and a new combined land-sea transportation route required dealing with serious financial and technical problems. Later 5 EU members (Poland, Slovakia, Hungary, Romania) declared that increased Ukrainian grain supplies negatively affected the income of national producers due to lower prices and significant amounts of sales. Responding to these concerns EU allowed five countries to temporary ban domestic sales of Ukrainian wheat, corn, rapeseed, and sunflower. After its expiration Hungary, Poland and Slovakia unilaterally extended this ban by the end of this year.

As statistics show Ukrainian grain export to five neighboring countries increased in 2022 (Table 2). Due to EU and national grain bans figures for 2023 need special analysis.

Table 2. Import of Ukrainian Cereals to neighbor EU members

Source: Access2Markets portal to support foreign trade by small businesses beyond the EU borders https://trade.ec.europa.eu/access-to-markets/en/statistics

The data shows that Poland became the biggest importer of Ukrainian grain in absolute terms among 5 countries both in monetary and physical terms. In MY 2022/2023 Poland collected a record harvest of wheat – 13 million tons (4% less than in the previous season). At the same time, barley production amounted to 2.8 million tons (same as previous year), rye – 2.5 million tons (+4%).  The total volume of grain production is estimated at 35.2 million tons (1% less than in the previous season).[5]

At the same time, Polish domestic price dynamics for the products mentioned were more or less in line with EU price fluctuations (See Graphics 1-3).

Graphic 1. EU market prices for milling wheat (EUR/tonne)

Source: Meeting of the Expert Group for Agricultural Markets – Subgroup Arable Crops and Olive Oil, https://ec.europa.eu/transparency/expert-groups-register/core/api/front/document/98389/download

Graphic 2. EU market prices for feed wheat (EUR/tonne)

Source: Meeting of the Expert Group for Agricultural Markets – Subgroup Arable Crops and Olive Oil, https://ec.europa.eu/transparency/expert-groups-register/core/api/front/document/98389/download

Graphic 3. EU market prices for feed barley – (EUR per tonne)

Source: Meeting of the Expert Group for Agricultural Markets – Subgroup Arable Crops and Olive Oil, https://ec.europa.eu/transparency/expert-groups-register/core/api/front/document/98389/download

2022-2023 price dynamics requires special analysis. Here we simply mention some points.[6] Last global grain prices started falling after sharp increase in the first months of the war in Ukraine due to fears of supply disruption. Poland’s then agriculture minister urged farmers to hang onto their harvests in the hope of a rebound and better returns. At the same time increased grain exports from Brazil and Russia resulted in lower world prices, EU allowed tariff-free Ukrainian grain imports and assisted Ukraine in establishing new logistic routes to the world markets. Combination of these factors definitely affected grain markets.

To sum up, we have not found compelling evidence that Ukrainian sales turned out to be the major factor that negatively affected the well-being of national producers though certain impact definitely took place. At the same time, lower import prices slow down internal inflation and this effect must not be neglected.

Claims that a part of Ukrainian “transit” grain was sold in the countries in question require special investigation. These types of schemes are impossible without local partners from the relevant country.

Resolving the conflict requires a joint Ukrainian-Polish approach. WTO and EU-Ukraine Association Agreements stipulate that bilateral consultations between the parties are the first stage of formal dispute settlement. This conflict (as well as any other conflict in the future) is a pure trade dispute and should be treated accordingly.

The immediate solution to the problem lies in the field of control over grain supplies and grain transit. The list of potential measures under discussion includes.

1. Transfer of veterinary control to the territory of the country of export destination to improve transit through Poland – Lithuania and Germany. In August, this mechanism was agreed upon by Hungary and Slovakia.
2. Introduction of minimal export prices and deposits for Ukrainian exporters. Deposits will be returned once the grain leaves the customs territory of the European Union.
3. Issuance of special licenses to Ukrainian companies allowing grain export (wheat, rapeseed, corn, and sunflower) to Poland. This mechanism requires clear procedures for the interaction of both sides in the licensing process.

At the same time, this grain conflict revealed a number of deeper political and economic problems.

1. This conflict shows national differences in assessing, how Russian aggression against Ukraine affects national economies in general and its specific sectors. These differences affect internal EU discussions about support to Ukraine. For example, Szymon Szynkowski vel Sęk, Polish Minister for EU Affairs, has suggested that Poland’s support for Ukraine may be reduced amid the crisis over Ukrainian agricultural imports.[7] Some countries have had different views on EU sanctions against Russia and even negotiated some special terms for applying EU restrictions for themselves.

Slovakia’s new Prime Minister, Robert Fico recently announced that “the war in Ukraine is not ours, we have nothing to do with it” and declared that if new sanctions “are going to harm us, …, I see no reason to support them”.[8]

2. The war has changed patterns of grain supply and the importance of specific markets for agricultural producers and consumers. These developments pose a challenge of “decoupling” political solidarity and military support from specific private economic problems and tensions.
3. Future Ukraine EU membership is a challenge for EU CAP as it is about the accession of one of the world’s top grain exporters.
4. “Grain solidarity” with Ukraine has a clear military dimension. There is a danger of Russian attacks on infrastructure objects located on the territory of Moldova and relevant EU-NATO members. The question is how these countries and NATO should react to hostile Russian actions against them.

It is clear that the performance of Ukrainian agriculture depends upon the dynamics of warfare. Currently, the short-term prospects of the sector are as follows.

Data shows that grain dropped in 2022/2023 compared with the previous period. At the same in 2023/2024, production will slightly increase but will not reach the level of the 2021 season (Graphic 4).

Graphic 4. Grain and oil crops harvest forecast for the 2023/2024 MY

Source: Ukrainian Grain Association, https://uga.ua/en/news/uga-again-increased-the-crop-forecats-in-2023-by-3-7-mmt-up-to-80-5-mmt-of-grains-and-oilseeds/#undefined

Exports from Ukraine in the new season of 2023/2024 can potentially amount to almost 49 million tons. In the last season (which ended on June 30, 2023), according to UGA, exports reached 58 million tons. The export of different products is mixed. (Graphic 5)

Graphic 5. Forecast of the export of grain and oil crops for the 2023/2024 MY (as of September 4)

Source: Source: Ukrainian Grain Association, https://uga.ua/en/news/uga-again-increased-the-crop-forecats-in-2023-by-3-7-mmt-up-to-80-5-mmt-of-grains-and-oilseeds/#undefined

Despite this year’s high harvest, exports are forecasted to be significantly lower or the same with a few exceptions than last year. The main reason is that last year a large amount of grain meant for export in 2022, was stuck in Ukrainian barns and could not be exported due to the start of the war.

According to Bloomberg, more than 30 vessels have called at ports in the Greater Odesa area since the corridor took effect in mid-September. The 32 ships that called at Ukraine’s ports in the month since Sept. 16 had a combined capacity of around 1.4 million tons.[9] So this route (taking into account all risks) in combination with Solidarity Lanes and lend – sea initiative (Black Sea corridor without Russia) is a viable alternative to the Black Sea Grain Initiative.

Footnotes:

[1] Government of Ukraine, the World Bank Group, the European Commission, and the United Nations. Ukraine Recovery and Reconstruction Needs Assessment, March 2023, p. 63, https://documents1.worldbank.org/curated/en/099184503212328877/pdf/P1801740d1177f03c0ab180057556615497.pdf.  

[2] Ibidem,

[3] Under Secretary-General for Humanitarian Affairs and Emergency Relief Coordinator, Martin Griffiths, Briefing to the Security Council on Ukraine, 21 July 2023, https://reliefweb.int/report/ukraine/under-secretary-general-humanitarian-affairs-and-emergency-relief-coordinator-martin-griffiths-briefing-security-council-ukraine-21-july-2023

[4] Government of Ukraine, the World Bank Group, the European Commission, and the United Nations. Ukraine Recovery and Reconstruction Needs Assessment, March 2023, p.  63, https://documents1.worldbank.org/curated/en/099184503212328877/pdf/P1801740d1177f03c0ab180057556615497.pdf.  

[5] Statistics of Poland, https://stat.gov.pl/en/topics/agriculture-forestry/agricultural-and-horticultural-crops/pre-result-estimate-of-the-main-agricultural-and-horticultural-crops-in-2023,4,1.html

[6] Why eastern Europe’s grain producers face a perfect storm. By Anna Koper, Gergely Szakacs and Luiza Ilie, May 9, 2023, https://www.reuters.com/markets/commodities/why-eastern-europes-grain-producers-face-perfect-storm-2023-05-09/  

[7] Polish government raises possibility of reducing support for Ukraine over grain crisis. EUROPEAN PRAVDA, UKRAINSKA PRAVDA — WEDNESDAY, 20 SEPTEMBER 2023, https://www.pravda.com.ua/eng/news/2023/09/20/7420588/

[8] Slovakia announces the end of military aid to Ukraine, https://www.euronews.com/2023/10/26/slovakia-announces-the-end-of-military-aid-to-ukraine

[9] Source: Bloomberg, https://www.bloomberg.com/news/articles/2023-10-18/ukraine-s-risky-bet-pays-off-with-ships-streaming-to-its-ports