THE BLACK SEA GRAIN INITIATIVE

 

                                                  THE BLACK SEA GRAIN   INITIATIVE

How it started and why it ended

 

 

 

Articlე by Agnieszka Kopertowska-Latoszek 

                 and Vakhtang Maisaia

 July 2023

Introduction

Whatever you call it, an unprovoked Russian full-scale invasion on Ukraine or a Special Military Operation in Ukraine, the aftermath is the same. February 24^th 2022 was the day when people started being killed in regular military actions, many had to leave their homes both to seek safe shelter abroad or to be deployed to the battlefield. Many buildings, roads, bridges, farmlands, factories, power plants started to be military targets rather than objects that serve the people like they should. Ever after the whole Europe is in great danger, great economic collapse and in a great mess.

 Apart from Europe itself, other countries are and will be also severely affected by ongoing or prolonging conflict. Unsurprisingly, these are often poor countries that cannot provide for themselves, are troubled by various hazards, and thus rely on international help. Because of the war, food - the basic need for each human being suffered the risk of not being supplied properly.

 That is why the United Nations’ Secretary-General, accompanied by Turkey, pushed to arrange an agreement for Ukraine’s food stocks and Russian food and fertilizers to flow undisrupted via The Black Sea. The agreement had the purpose of preventing global hunger, reducing and addressing global food insecurity, and ensuring the safety and security of merchant ships entering or departing Ukrainian ports.

 The document was finally signed on July 22^nd 2022 in Istanbul, Turkey by representatives of Ukraine, the Russian Federation, Turkey and the United Nations and is recognized under the name The Black Sea Grain Initiative.

Terms of Agreement

All participants of the Initiative agreed to establish a Joint Coordination Centre (JCC) in Istanbul, comprised of representatives of Ukraine, the Russian Federation, Turkey and the United Nations, which role was to enable the resumption of exports from Ukraine of grain, other foodstuffs, and fertilizer, including ammonia, through a safe maritime humanitarian corridor from three key Ukrainian ports, Chornomorsk, Odesa and Yuzhny, in the Black Sea to the rest of the world.

At the same time, according to a separate agreement, The UN will be engaged “to facilitate the unimpeded exports to world markets of Russian food and fertilizer – including the raw materials required to produce fertilizers. This agreement is based on the principle that measures imposed on the Russian Federation do not apply to these products.”¹ The intention of this part of the deal was minimizing the impact of western sanctions on the export of Russian food and fertilizers.

 Once the conflict started in February 2022 the maritime routes used for exporting the grains from Ukraine to the world were on hold, because of the military activities in the Black Sea. The area was mined by both sides of the war, which made safe shipments of agricultural products impossible. The Joint Coordination Centre was appointed to monitor the loading of grains into ships in Ukrainian ports before the vessel is navigated through clear of mines pre planned routes based on maps provided by Ukrainian military. The shipments were to be navigated towards Turkey’s Bosphorus Strait. Vessels entering Ukrainians ports are under supervision to control if they do not carry any weapons.

The Agreement was initially signed for 120 days with the option of renewing it.

 

 Map 1. Ports and routes of The Black Sea Grain Initiative

Source: https://www.un.org/sites/un2.un.org/files/black_sea_grain_initiative_shipping_route_25_august_2022.pdf

 

Key figures

The two fighting this war sides are one of the greatest providers of soft commodities like wheat, corn or sunflower products to the world. Both Ukraine and Russia are breadbaskets for many people in different parts of the world. Moreover both countries are producers of fertilizers and their components.

Regarding world’s wheat exporters, both countries are among the top 15 in 2022 by value.² The countries from the list below account for 90,4% of globally exported wheat by value, Ukraine and Russia combined covered 14,3%.

 

1.  Australia:     US$10.2 billion (15.4% of total wheat exports)

2.  United         States: $8.52 billion (12.9%)

3.  Canada:       $7.9 billion (12%)

4.  France:        $7.4 billion (11.2%)

5.  Russia:         $6.8 billion (10.3%)

6.  Argentina: $3.1 billion (4.7%)

7.  Ukraine:      $2.7 billion (4%)

8.  Germany:    $2.2 billion (3.3%)

9.  India:           $2.13 billion (3.2%)

10.  Romania: $2.1 billion (3.2%)

11.  Kazakhstan: $1.9 billion (2.9%)

12.  Bulgaria: $1.5 billion (2.2%)

13.  Poland:      $1.4 billion (2.1%)

14.  Lithuania: $1 billion (1.5%)

15.  Brazil:        $967.3 million (1.5%)

 

 Map 2. Wheat production, 2021

 Source:https://ourworldindata.org/grapher/wheat-production?facet=none&country=AUS~USA~CHN~CAN~BRA~ARG~RUS~KAZ~UKR~ DEU~FRA~POL~GBR~TUR~ROU

 Chart 1. Wheat production in tonnes, 1961-2021

Source:https://ourworldindata.org/grapher/wheat-production?tab=chart&facet=none&country=AUS~USA~CHN~CAN~BRA~ARG~RUS~ KAZ~UKR~DEU~FRA~POL~GBR~TUR~ROU

The next important commodity is corn, where both Ukraine and Russia are listed among top 15 countries accounting for 93,5% globally export by value in 2022, and together the countries provided 10,7% of world’s export.³

 

1.  United States: US$19 billion (30.5% of total corn exports)

2.  Brazil:          $12.3 billion (19.6%)

3.  Argentina: $8.6 billion (13.8%)

4.  Ukraine:      $6 billion (9.6%)

5.  France:        $2.4 billion (3.8%)

6.  Romania:     $2 billion (3.2%)

7.  Poland:        $1.3 billion (2.1%)

8.  South           Africa: $1.2 billion (1.9%)

9.  India:           $1.12 billion (1.8%)

10. Paraguay: $1.09 billion (1.7%)

11.  Hungary: $917.4 million (1.5%)

12.  Russia:       $705.2 million (1.1%)

13.  Canada:     $700.4 million (1.1%)

14.  Myanmar: $658.4 million (1.1%) 

15.Serbia:      $420.9 million (0.7%)

 Compared to 2021 Ukraine corn export by value in 2022 was up by 2% and Russian was down by 6,2%.⁴

 

Map 3. Corn production, 2021

Source: https://ourworldindata.org/grapher/maize-production?tab=map

Chart 2. Corn production in tonnes, 1961-2021

Source:https://ourworldindata.org/grapher/wheat-production?tab=chart&facet=none&country=AUS~USA~CHN~CAN~BRA~ARG~RUS~ KAZ~UKR~DEU~FRA~POL~GBR~TUR~ROU

 In terms of sunflower seed oil Ukraine has been the world’s top producer for many seasons back, outrunning competitors by vast numbers, according to statista.com. The war resulted in lower exports from Ukraine but the export amount from Russia completes the gap. Looking at the numbers for presented seasons the combined export volumes from both countries were the lowest.

Chart 3. Export volume of sunflowerseed oil worldwide from 2016/17 to 2022/23, by country (in 1,000 metric tons) Source: https://www.statista.com/statistics/620317/sunflowerseed-oil-export-volume-worldwide-by-country/

 

 Other products listed in The BSGI are fertilizers that are crucial plant growth drivers essential in modern farming. There are various kinds of products: nitrogen-based, potassic-based, phosphatic-based, animal or vegetable fertilizers. According to World’s Top Exports⁵ the biggest fertilizer exporters in 2022 were:

 

1.  Russia:         US$20.7 billion (15.5% of total exported fertilizers)

2.  Canada:       $13.7 billion (10.3%)

3.  China:          $11.4 billion (8.5%)

4.  United States: $8.5 billion (6.4%)

5.  Morocco:     $7.7 billion (5.8%)

6.  Saudi Arabia: $6.8 billion (5.1%)

  The group listed above accounted for 51,6% of globally exported fertilizers in 2022. Ukraine was not listed among 30 top exporters last year.

Chart 4. Ammonia production worldwide in 2022, by country(in 1,000 metric tons)

Source: https://www.statista.com/statistics/1266244/global-ammonia-production-by-country/

The best way to present the market situation in wheat and corn is to show the grain prices in the USA and Europe. Chicago Board of Trade (CBoT) and Euronext Derivatives Paris (EDP) are main price sources and markets to trade. Start of the war caused the prices of Futures to skyrocket.

Chart 5. Wheat Futures CBoT in white, Milling Wheat Futures EDP in blue, 5Y chart

Source: Bloomberg

Chart 6. Wheat Futures CBoT in white, Milling Wheat Futures EDP in blue, since January 2022

Source: Bloomberg

 

 The situation went under control after the BSGI was signed and for the previous year wheat prices descended systematically to bring relief to each consumer. The price slide of American wheat Futures was from the highest point of 1425 USd/bushel to 591USd/bushel, in terms of European wheat Futures from 438,25 EUR/mt to 218 EUR/mt.

What happened?

The counterparty that terminated or suspended the Agreement was The Russian Federation. According to the Kremlin for the past 12 months only Ukraine was guaranteed the full possibilities to operate under the terms agreed but the part concerning Russia has not been implemented. The deal was one-sided only. Russian officials have been pointing out throughout the last couple of months that Russian demands are not met, nonetheless they continued to operate as agreed.

There were several flash points raised by Russian side⁶:

 ●         Exclusion of the Russian Agricultural Bank from SWIFT has not been terminated, the bank continued to operate under sanctions as the rest of the Russian banking system.

●         Restrictions on insurance and reinsurance for vessels carrying Russian grains

were not lifted, which made shipments of Russian agricultural product much more difficult and pricy.

●         Resumption of supplies of agricultural machinery and parts did not take place, similarly

●         Resumption of the Togliatti-Odesa ammonia pipeline.

●         Freezing of assets and the accounts of Russian companies involved in food and fertilizer exports were not lifted.

 Another complaint from the Russian side was that the main purpose of the deal – providing food products to the most fragile and troubled places, like African countries, was ignored. The grain trades were mostly commercial and not a great percentage eventually arrived at the most demanding destination.

 

Chart 7. Volume of agricultural exports from Ukraine secured by the Black Sea Grain Initiative from August 3, 2022 to July 17, 2023, by country(in million metric tons)

Source: https://www.statista.com/statistics/1333847/ukrainian-agricultural-exports-via-the-black-sea-by-country/

  During the latest Russian-Africa Summit held in St. Petersburg President Putin was urged by African Union representatives to end the Ukrainian conflict and revive the Initiative to avoid price rise and food shortages. During the summit Russia promised to deliver 300 000 tons of free grain, and covered shipment fees to six African countries. The gesture was kindly accepted although a ceasefire would be much more beneficial to the whole world.