What will the end of the Black Sea grain deal do to wheat prices?

In July 2022, the United Nations and Turkey achieved a rare diplomatic breakthrough and finalised a deal known as the Black Sea Grain Initiative. This deal allowed for the shipment of grain from Ukraine despite Russia’s ongoing war in the country, with the aim of preventing a global food crisis.

Additionally, the deal enabled Russia to export food and fertiliser worldwide, despite facing Western sanctions.

The agreement was initially planned to be extended every four months. However, in the last two instances, it was only extended for two months each. This change came amidst growing discontent from Russia, as it perceived restrictions that limited the full dispatch of its grain and fertiliser exports. On Monday 17th July, Russia announced its withdrawal from the initiative.

“The suspension of the Black Sea Grain Initiative in isolation may not destabilise global food inflation in the short term, as Ukrainian grain shipments declined significantly from March to June, down 48.6 per cent during this period,” said Kumar Amit, Senior Specialist at The Smart Cube. “Ship inspection rates also experienced a substantial decline during the period.”

However, termination of the grain deal, combined with concerns related to possible drought in Europe and the onset of the El Niño weather phenomenon in the second half of 2023, may lead to a supply shortfall, putting upward pressure on prices.

Reflecting these dynamics, ETFs tracking the wheat market have surged in value this week. Just by way of example, the Teucrium Wheat Fund [NYSE Arca: WEAT] has jumped from $6.31 to $7.11 in the last few trading sessions in the US. Trading volumes in the ETF have also picked up since the middle of June. It is still some way off the recent high of $7.79 it established in February however.

Warmer than average summer in Europe

The Smart Cube’s Amit thinks seasonal weather forecasts point to a warmer-than-average summer, with higher-than-average precipitation levels expected for the Mediterranean region. However, for central and northern Europe, particularly for the regions around the Baltic Sea, precipitation is expected to be significantly lower than usual.

“One of the key challenges to global food supply will be that grain shipment from Ukraine is likely to decrease,” Amit said. “Indeed, Ukraine will now be compelled to export the majority of its grains and oilseeds through its land borders and Danube ports. This change will significantly increase transportation costs and negatively affect Ukrainian farmers’ profits. Also, these routes, both land and river, handle lower quantities compared with sea shipments.”

Even if Russia does not block or attack Ukrainian ships carrying food supplies, ship owners will face higher insurance premiums to enter the Black Sea. Consequently, they may be hesitant to send vessels through a war zone without assurances of safety.

What’s more, Ukraine’s shipments through Europe have also caused dissatisfaction among some European countries, claiming that they have undermined local supplies. As a result, Bulgaria, Hungary, Poland, Romania, and Slovakia have banned domestic sales of certain Ukrainian grains.

Other key challenges are that a drop in exports may lead to increased stockpiles in Ukraine and could force farmers to reduce sowing in the 2023-24 season. Russia might increase the export tax on wheat to finance its military campaign in Ukraine and, finally, shortage of fertilisers may intensify as Russia, together with Belarus, is one of the world’s largest sources of mineral fertilisers. Both these countries account for approximately 14 per cent of the world’s fertiliser production and exports.

Overall, stocks of key grains and vegetable oils (except for wheat) will likely remain higher by end of the 2023/24 marketing year (MY) vs. the levels in MY2021/22 (when the Russia-Ukraine war started). Wheat stocks are estimated to decline 2.2 per cent during the period.

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