Suspension of the Black Sea Grain Initiative: What has the deal achieved, and what happens now?
Russia’s October 29 announcement that it was suspending its participation in the Black Sea Grain Initiative—which allows shipments out of Ukrainian ports—was not a surprise; Russia had been skeptical of the deal since the start. But now the supply disruptions will begin again: the move will have a negative impact on Ukraine, its customers, on world market prices—and global food security, particularly for countries in the Middle East and North Africa (MENA) region. Not only are those countries more dependent on Ukraine as a supplier of wheat and other grains, but they tend to buy more during the winter to supplement their own harvests, which are largely consumed by the end of the year. The renewed interruption in imports could increase food insecurity in these countries and potentially exacerbate political tensions.
The Black Sea Grain Initiative
The Black Sea Grain Initiative, a UN-brokered agreement between Russian and Ukraine, was signed on July 22. The agreement allowed for exports of grains and related foods to resume from the ports of Odesa (Odessa), Chornomorsk (Chernomorsk), and Pivdennyi (Yuzhny), which had been effectively blocked since mid-February, first by Russian military exercises, then by mines placed by Ukraine to prevent possible Russian sea-based attacks after the invasion. Ukraine ships almost 75% of its agricultural exports through the ports on the Black Sea. About half of those exports go out through the three ports covered by the deal. The agreement has also paved the way to additional measures aiming to ease trade costs in the area by reducing insurance premiums, including through special facilities.
The 120-day agreement was scheduled to expire in mid-November, and while many hoped for its renewal, Russia has been critical of it, and almost since the signing had threatened to end it once the official expiration date arrived. In addition, the grain shipments have faced slowdowns in recent weeks. Clearing times increased from an average of nine days in September between departure from Ukrainian ports to the finalized inspection in Türkiye (Turkey), to an average of 16 days in October, leading to an increased backlog of ships.
As of October 28, over 9.3 million metric tons of grains, oilseeds and other foodstuffs had been exported under the agreement. The deal had allowed Ukraine to more than double its exports compared to the pre-deal level—though it is still operating at 50% of its prewar 2021 level (Figure 1). So, while the deal did not solve all the problems surrounding food exports from the conflict zone, it was important in easing the pressure on regional markets and on Ukrainian farmers unable to move their products. Terminating the agreement now—when Ukraine typically ships a sizable portion of its annual export volumes, particularly wheat—will pose significant problems for Ukraine and its customers.
Where are the exports going?
Russia has claimed, among other things, that the deal mainly benefits high-income countries. However, this criticism fails to account for distortions in export patterns caused by the war. Shipping was shut down from February-July, the period when Ukraine typically ships most of its maize, the majority of which goes to Europe. When the deal took effect, maize exports swelled (4 million tons from August-October vs. 1.36 million tons for the same period in 2021). However, both European and MENA countries saw their maize imports increase dramatically during this period and received roughly the same proportions as in 2021, as shown in Figure 2.
Meanwhile, some of the poorest countries, in particular in Africa south of the Sahara, have received the same share as last year in wheat exports. In addition, according to the UN Black Seas Grain Initiative Joint Coordination Centre, about 150,000 tons of wheat has been exported through the World Food Programme to poor countries in the Horn of Africa (Djibouti, Ethiopia, Somalia and Yemen) and to Afghanistan.
What will the impact be if the agreement is not renewed?
By the time the agreement was signed in late July, market prices for wheat, maize and other commodities had already fallen significantly from historical highs reached in mid-May. The decline was due to many factors including a strong dollar, declining transportation costs, weakening global demand, a strong corn harvest in Brazil, and less-than-anticipated drought damage to wheat harvests in Western Europe and North America. Then, after some uncertainties in September pushed prices up again (Figure 3), hopes that the agreement would be extended lowered pressure on prices during the past few weeks. Before Russia suspended the deal, grain prices had stabilized at pre-war levels; however, they remain 50% higher, or more, than January 2020 levels.
Now, with Ukraine exports again on hold, the deal’s suspension will increase pressure on world prices, especially for wheat, whose projected global inventory levels remain at a historically low level. The suspension will also immediately disrupt key grain supplies for MENA countries—in particular Türkiye, Egypt, Lebanon, Sudan, and Yemen, which were benefiting from the resumption of Ukraine exports.
Futures prices for wheat and maize were up 5% and 2%, respectively, following announcement that Russia had terminated the deal. Higher global market prices mean consumers around the world will pay more for imports.
Unfortunately, the suspension also means that Ukraine producers will see little if any benefit from higher prices. Significantly less grain will be moved out of Ukraine, creating more pressure on storage facilities that are already at capacity as Ukraine farmers harvest spring-planted crops. Lack of storage facilities and restricted export opportunities means lower prices for farmers.
Lower prices will bring some Ukrainian farmers to the verge of bankruptcy and create further disincentives to plant for next crop year. Even prior to the suspension, Ukraine Agriculture Minister Mykola Solsky said farmers would sow 20% less winter wheat this fall. A drop in 2023 production would mean the third straight year of disruptions to the Ukraine wheat crop. As Ukraine typically accounted for about 10% of global wheat exports before the war, the effect on global markets is akin to back-to-back droughts over 3 years in a major wheat-producing region, and it likely means that global stocks will not recover for at least another year. Tight stocks means continued high prices and volatile markets.
Russia’s suspension of the Black Sea Grain Initiative is a setback for efforts to reduce the impacts of the war in Ukraine on global consumers, particularly those in the MENA region most reliant on grain imports from Ukraine ports—once again threatening food security in those countries. Efforts are underway by the United Nations and Türkiye to bring parties back to the negotiating table, but for the moment, prospects look dim. The short-run effects will include higher global prices and a continued disruption in trade patterns for those countries that have depended on Ukraine for grain and oilseed imports. The suspension will also hurt Ukraine’s producers, meaning that market disruptions will continue to have global impacts into 2023 and perhaps beyond.