Russia is threatening to tug the plug on the Black Sea Grain Initiative on May 18, blocking Ukrainian seaborne exports of corn and wheat. The European Union has banned Ukrainian agriculture exports to neighboring Romania, Bulgaria, Poland, Hungary and Slovakia until June 5, with an extension through year-end possible. The Tolyatti-Odessa pipeline, a key conduit for Russian exports of ammonia — a significant fertilizer feedstock — stays offline.
CNBC recently warned that “the fundamental food security of tens of thousands and thousands across the globe is hanging by a thread.” The United Nations stressed that the Black Sea Grain Initiative is “critical” and helps “stave off famine.”
Prices of agricultural products and fertilizers spiked after Russia’s invasion of Ukraine. Is the world headed for a brand new food-inflation crisis?
Not this time, based on commodity price-reporting agency Argus. Global trade flows have evolved over the past 14 months, adjusting for the war risk. Ocean shipping has come to the rescue, plying recent routes: from bulkers carrying wheat, corn, and fertilizers to liquefied petroleum gas (LPG) carriers loaded with ammonia to product tankers transporting sunflower oil.
“Markets discover a way,” said Mike Nash, senior editor of fertilizer markets at Argus, during a presentation on Thursday. Geopolitical impacts have already “largely played out,” he said.
Recent threats not lifting commodity prices
Ukraine’s role in global markets has eroded whilst its exports moved overland to neighboring countries and left by ship though the Black Sea corridor. Consequently, a lack of Ukrainian exports now would have much less impact on buyers than it did when the war broke out.
The proof is in the costs. Not only are agricultural commodity prices down sharply from the post-war peak, they’re not rising as recent threats to Ukrainian exports emerge.
In keeping with Jade Delafraye, Argus’ global editorial manager for agriculture, “The situation in Ukraine has had a big impact on the grains, oilseeds and veg-oil markets over the past 12 months or so. But in the meanwhile, the share of Ukraine in the availability of those markets has been greatly reduced. And these markets are well supplied.
“Due to this fact, the concerns and uncertainties about whether Ukraine will find a way to proceed exporting are usually not currently sufficient to lift prices.”
A gathering of Black Sea corridor technical staff was held Friday in Istanbul to debate the extension of the deal. No agreement was reached. On the eve of those talks, at a separate meeting of diplomats in Ankara, Turkey, a Russian representative grabbed a Ukrainian flag out the hands of a Ukrainian member of parliament and the Ukrainian MP punched the Russian within the face.
The variety of Black Sea transits from Ukraine has fallen even before a call on extending the corridor agreement. Only six vessels left Ukrainian ports in essentially the most recent week. “That is down sharply from where we were a couple of months ago, with a peak of 55 ships [in a week] back in September,” noted Delafraye.
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Russian wheat exports hitting record levels
When the ports were closed within the early days of the war, Ukraine exported its wheat, corn and barley by land through Romania, Hungary, Slovakia and Poland. Starting last August, it began exporting grains — primarily corn — via the Black Sea corridor.
Wheat prices initially spiked after war broke out after which “got here tumbling down,” said Delafraye.
The return of Ukrainian exports was not the foremost driver within the drop. Bumper wheat crops in Russia and Australia were the first aspects. “Russia has been in a position to export at record levels and gain market share,” she said.
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The U.S. Department of Agriculture currently projects global wheat exports will total 212.7 tons within the 2022-23 marketing 12 months (which ends June 30), up 5% 12 months on 12 months. Russia is the biggest exporter, predicted to ship 45 million tons — a 36% year-on-year surge.
Worst-case scenario for Ukrainian exports
Delafraye addressed a worst-case scenario by which Ukraine seaborne exports go to zero. Even in that case, “there aren’t any real concerns … on whether the worldwide market could cope without Ukrainian volumes,” she said.
For the present marketing 12 months, there are “ample [wheat] volumes left to be exported” from Russia, Romania, Bulgaria, Canada and Australia. For the 2023-24 marketing 12 months, strong ending stocks should allow the EU, Russia and Australia to ramp up exports to cover the wheat shortfall, she added.
Corn prices fell from their post-invasion peak as well, “although not as much as wheat, despite the incontrovertible fact that the vast majority of the Ukrainian exports through the corridor and by land have been corn exports,” Delafraye said.
If Ukrainian corn exports were blocked, she said, substitute volumes might be exported by the U.S., Brazil and Argentina. “We expect one other bumper crop to come back out of Brazil,” she said.
“On the corn side, again, the lack of Ukrainian volumes in a worst-case scenario might be compensated for elsewhere. What happens with the corridor in the meanwhile now not moves prices and the world would find a way to manage.”
Shipping effect of Black Sea corridor
“Global corn and wheat prices have continued to say no and have now fallen below pre-war levels, indicating an improvement in cargo availability,” said ship brokerage Braemar in a research note on Thursday.
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In keeping with Braemar, China has been the only largest destination for ships carrying Ukrainian grain through the Black Sea corridor, followed by countries in Western Europe, and to a lesser extent, North Africa, India and Bangladesh.
A complete of 764 dry bulk vessels carrying 27.8 million tons of grain have departed Ukraine for the reason that starting of the Black Sea Grain Initiative.
Braemar said 386 or 50% of the ships have been have been Handysizes (smaller bulkers with capability of 10,000-39,999 deadweight tons or DWT), 216 or 28% have been Panamaxes (58,000-78,999 DWT) and 162 or 22% have been Supramaxes or Ultramaxes (50,000-69,999 DWT).
The vast majority of exports to China have been transported aboard Panamaxes, creating “a big additional long-haul trade for the sector,” said Braemar.
Shipping demand is measured in ton-miles (volume multiplied by distance). An end to the Black Sea initiative just isn’t necessarily negative for shipping demand. More Brazilian and Argentinian corn cargoes to China can be a positive for ton-miles, as would more Australian wheat cargoes headed west and more Canadian cargoes headed east.
Ban on exports to neighboring EU countries
Meanwhile, concerns are also being raised in regards to the recent ban on Ukrainian exports to neighboring EU countries, where local farmers are rebelling because the glut cuts their income.
Delafraye said that this shouldn’t have a big effect on international markets, since the agreements still allow Ukrainian cargoes to transit these countries for export.
The vast majority of Ukraine’s cross-border trade has gone to Romania, with about 70% of those volumes then re-exported, based on Argus data.
“So, so long as transit stays possible through these countries, and that’s the situation we appear to be in, the impact on the worldwide market ought to be limited,” said Delafraye.
‘Myths’ on Russian fertilizer threat
Food security fears within the wake of the invasion were not only in regards to the lack of Ukrainian grains. They were also about lack of access to Russian fertilizers and fertilizer raw materials.
“Concerns were very, very real because Russia is a serious supplier,” said Nash.
Fertilizer prices were already very high when Russia invaded Ukraine, and skyrocketed after military motion, with the phosphorus fertilizer DAP topping $1,200 per ton at one point.
But as with the wheat and corn, fertilizer prices then fell back. “Prices trailed off within the second half of 2022. It was significant and comparatively quick,” Nash said. “The market reacted as recent supply sources opened up and Russian materials continued to flow. In lots of cases, supply increased, so the priority dissipated.”
Russian exports of DAP and the opposite foremost phosphorus fertilizer, MAP, rose in 2022 versus 2021. “Combined exports increased by well over 4 million tons. This myth that phosphate supply was curtailed is just not true. Russia actually exported more,” said Nash.
US buys more Russian fertilizer
Russian urea exports increased 10% in 2022 versus 2021. Higher Russian volumes to India and Turkey mirror moves within the oil and diesel markets. What’s surprising is that Russia also sold more urea to the U.S., the Netherlands, France and Germany.
“One other of the myths is that European and Western entities turned their back on Russian [fertilizer]. That didn’t occur,” said Nash. “There aren’t any sanctions on Russian [fertilizer] products. It’s in theory free to maneuver in every single place — and it has.
“For all of the concerns within the mainstream media in regards to the lack of supply of Russian fertilizer, it simply didn’t occur.”
As with grains, the proof of availability is in the costs. They’re falling. “The story for just about all of the products within the finished fertilizer market is weak prices [that] are expected to edge down,” he said. “The market has adapted. Recent trade flows have emerged. There’s plenty [of fertilizer] around the globe.”
Fertilizer shipping markets: Tankers and bulkers
The war’s biggest and most immediate effect on fertilizer markets was the closure of the Tolyatti-Odessa ammonia pipeline. “That was shut off immediately, losing 240,000 tons per 30 days of ammonia overnight. That had a big impact on prices,” said Nash.
Russia was supplying the EU with 100% of its ammonia imports on the time the war broke out. That is one more instance where ocean shipping solved the issue. Global trade flows shifted to recent routes, offsetting the pipeline loss. Ammonia prices are actually back to pre-war levels.
Ammonia is often carried aboard smaller LPG tankers within the Handysize category. Short-haul shipments from Odessa have been replaced by long-haul shipments from China, Australia, the Middle East and the U.S. Gulf.
The brand new trade patterns are “resulting in a rise in ton-mile demand for our vessels,” said Navigator Holdings (NYSE: NVGS). Ten of its Handysizes — a 3rd of its Handysize tanker fleet — were carrying ammonia throughout the latest quarter.
In dry bulk shipping, most fertilizer is carried on bulkers with capacities of three,000-60,000 DWT, particularly within the 25,000-39,999 DWT range, said ship brokerage BRS in a March overview of the trade.
Fertilizer has been a mixed bag for dry bulk shipping. On one hand, freight rates for Russian cargoes spiked after the war and remain above pre-invasion levels. On the opposite, global dry bulk fertilizer exports fell 9% in 2022 versus 2021, said BRS. China and Morocco sharply reduced exports, with China intentionally limiting outflows to guard domestic supplies within the wake of last 12 months’s price spike.
Lower prices in 2023 “could give some spring to fertilizer trade flows later this 12 months, providing much-needed respite to geared bulkers,” said BRS.
Russian takes more market share
Add all of it up and Russia emerged as an enormous winner amid all of the post-war shifts within the agribulk and fertilizer trades.
The country faces sanctions within the crude and diesel markets, but given humanitarian concerns, sanctions are off the table with regards to food and fertilizer commodities. Even America buys Russian fertilizer.
Because the war began, Russia has increased its market share and sales of wheat, in addition to urea, DAP and MAP. If it blocks the Black Sea Grain Initiative, it could sell much more wheat at Ukraine’s expense.
The damage to Ukraine’s role in global markets has already been done. The lack of the corridor would intensify the fallout to its economy, further solidifying recent trading patterns.
“All in all, it could take years for Ukraine to regain its previous place in global agricultural markets should the conflict come to an end,” said Delafraye.
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