What's the Biggest Threat to Global Grain Supplies? It's Actually Russia's Exports, Not Ukraine
John Payne of hEDGEpoint Global Markets says there’s one remaining port in Ukraine currently open, which is Izmail. He says the port is located extremely west, almost in Romania, and while Russia also targeted Izmail over the weekend, but to a lesser degree with grain continuing to move from that location.
Russia continues to ramp up attacks on Ukrainian ports on the River Danube. Local officials say more than 60,000 metric tons of grain have been destroyed in the past week while also crippling grain storage infrastructure.
Grain prices continue to rally in the U.S., with wheat futures closing limit up on Monday. That opened the door for expanding trading limits on Tuesday. However, agricultural economists and markets analysts point out the situation still hasn’t reached a worst-case scenario yet.
Since Russia put a halt to the UN brokered grain deal last week, the Danube is a key export route, and the grain facilities under attack are located across the river from Romania, a NATO member.
According to John Payne, after Russia targeted Odesa over the weekend, there’s one last port in Ukraine currently open, which is Izmail. He says the port is located extremely west, almost in Romania. Payne says Russia also targeted Izmail over the weekend, but to a lesser degree with grain continuing to move from that location.
“This represents close to 25% of what they are able to export,” says Payne of hEDGEpoint Global Markets. “Fifty percent goes out of Odesa, which is now closed. The last 25% leaves over land, but keep in mind the countries around Ukraine don’t want this supply because it will hurt their own farmers.”
Not only are ports being targeted, but Russia’s defense ministry said last week Russia would deem all ships traveling to Ukrainian ports to be potential carriers of military cargo. The escalation could cause shipping insurance rates to climb, another threat to moving grain out of Ukraine.
What’s the Worst-Case Scenario for Black Sea Grain Supplies?
So, what would be worst case? The July Ag Economists’ Monthly Monitor, a survey of nearly 60 ag economists from across the U.S., recently asked economists to share their views on what are some potential factors that could shape agriculture over the next 12 months but aren’t currently being discussed or highlighted enough. The survey was completed just days before Russia pulled out of the grain deal, but one economist was already concerned about an escalation.
“The current assumption is that the Ukraine grain initiative will stop, but that Ukraine will work with Turkey and the UN to continue shipments,” said the ag economist in the anonymous survey. “What happens if Russia strikes a ship, but then Ukraine strikes back by hitting an outbound ship carrying Russian wheat or crude oil? Maybe a low risk, but massive implications for the commodity markets if commodities coming out of Russia slow or halt. And two, what if an ‘accidental’ war breaks out between U.S. and China in the South China Sea, bringing a halt to commodity trade with China?”
The concern may seem extreme, but after the escalation over the past week, it seems to be a possibility. This past weekend on U.S. Farm Report, Payne said when you look at the global balance sheets, the loss of the Ukraine crop, at least the export terminals, isn’t a huge deal. He says what could be a huge deal is a lack of any commercial shipments in the Black Sea.
“The biggest question in all of this is what happens to Russia shipments,” says Payne. “Russians feed a lot of the poorer countries as well as float a lot of oil from the ports in the Black Sea. Our worry is what happens if those stop? All of the sudden the hungry of the world will come for U.S., EU and South American supply. Thankfully, the Brazilians have it now, but prices need to keep going to incentivize supply growth.”
Russia’s Grain Supply
Payne says the following Bloomberg charts show Russia’s weekly grain exports compared to Ukraine’s weekly exports. Ukraine’s grain exports tanked once Russia invaded Ukraine, increased after the grain deal was brokered, but then have seen another sharp decline since May. That compares to Russia where grain exports reached record levels in July before seeing a sharp drop.
DuWayne Bosse, of Bolt Marketing out of South Dakota, says the trade talk overnight Tuesday was that barges are still being loaded at Ukrainian ports despite the recent attacks. He says there’s also talk that Ukraine may attack Russia’s Kerch Bridge, which is the passageway for nearly half of Russia’s wheat exports.
The potential strike to Russia’s exports is one that Chip Nellinger, Blue Reef Agri-Marketing, also discussed on U.S. Farm Report this weekend. He says the commodity markets already knew there would be a massive drop in Ukraine’s production this year compared to a year ago.
“In my mind, it’s more about Russia, and they supposedly have a big crop,” says Nellinger. “That Black Sea grain corridor probably benefited Russia as much as much as it did Ukraine. And now if that’s going to really slow, and there’s been talk that Russia is going to keep some of that wheat off the market for an internal supply reserve, so to speak.”
Nellinger says bigger picture, the question is if Russia will continue to supply the world now that the Black Sea is closed, and he says India and China have been big benefactors of Russia’s grain.
Ag economists were also asked to provide their thoughts on the top three factors that could impact trade relations between the U.S. and China. Several economists responded that one of the biggest factors will be China’s support for Russia.
This content was originally published at AgWeb: https://www.agweb.com/news/crops/wheat/whats-biggest-threat-global-grain-supplies-its-actually-russias-exports-not
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