What would the expiry of the Russia-Ukraine grain deal imply for the global economy?

The importance of the deal:

The Black Sea Grain Initiative was implemented in July 2022 to allow the export of Ukrainian agricultural produce via Black Sea ports despite the war. Since then, the Initiative has enabled the shipment of over 30 million tons of crops to world markets—around three-fifths of Ukraine’s total grain exports during the period. The majority of the wheat and corn exported via the Initiative have gone to developing countries, particularly those in the Middle East and Africa. That said, the deal’s survival beyond the current expiry date of 17 July appears in doubt, with Russia demanding Western sanctions relief as a prerequisite for any extension.

Ukraine’s role in commodity markets:

In 2022–2023, despite the pains of war, Ukraine still represented around 7% of global wheat exports and 15% of corn exports. Before the conflict began, the country also exported close to half of the world’s sunflower oil; due to difficulties posed by the conflict, Ukraine is now exporting more unprocessed sunflower seeds instead, which are then turned into oil abroad.

Alternative trade routes:

Given Ukraine’s relevance in global commodity markets and the Black Sea Grain Initiative’s importance for Ukraine, a breakdown of the deal would put upward pressure on global grain prices. This would come on top of the Kakhovka dam collapse in early June, which is already set to hamper Ukrainian agricultural production going forward. That said, since the war began, Ukraine has diversified its export routes: Agricultural produce is now being moved by road, rail and river to Europe, with a substantial portion handled by Romania’s Constanta port. As a result, in recent months, shipments via the grains corridor with Russia have accounted for well under half of the total. This tendency will accelerate if the deal collapses, mitigating the impact on global food supply and, thus, prices.

Our agricultural price forecasts:

The current Consensus among our panelists is for both wheat and corn prices to average close to their June levels in the coming quarters, and for agricultural commodities as a whole to average slightly below June levels. Many panelists are likely banking on a last-gasp extension to the grain deal; others, on Ukraine’s ability to reroute its exports through Europe in the event of a collapse. Moreover, other major grain producers are expected to see stronger output ahead, which should more than compensate for lower Ukrainian supply. Argentinian grain production is seen rebounding from a drought-stricken recent harvest, for instance, with the U.S. also seen raising output and exports. Failure to extend the Black Sea Grain Initiative would undoubtedly be bad news for the global food supply. But a repeat of the food price spikes seen in 2022 is not on the cards.

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Insight From Our Analyst Network

On wheat exports, analysts at the EIU said:

“Ukraine is beginning to look beyond the current deal, in the first instance establishing a new insurance fund as the basis for a possible future arrangement (without Russia’s participation). Despite the current issues, there is sufficient capacity for Ukraine’s wheat export programme to continue in some form outside the safe shipping corridor, mainly routed through neighbouring EU countries.” 

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