Deal signed to resume exports of Ukrainian grain, but implementation questions remain

On July 22, Ukraine and Russia signed parallel deals with Turkey and the United Nations to allow for the resumption of exports of grain and other food commodities through three of Ukraine’s most important Black Sea ports—Odesa, Chernomorsk, and Pivdennyi—for an initial three-month period. However, successful implementation of this deal remains to be seen, and there is some doubt that Russia is sincere in its intentions. As part of the deal, Russia agreed not to target ports while grain shipments were in transit. However, just the day after the agreement was signed, two missiles struck the port of Odesa, though Russia denies involvement.

Successful resumption of Ukrainian exports would free up storage in Ukraine for the crops currently being harvested and provide Ukraine with an expected 1 billion USD of foreign currency inflows per month for an initial period. However, export supply chains would continue to face some challenges even if the deal is implemented relatively successfully, due to issues such as the potential reluctance of shipping companies to operate near the ongoing conflict, the need for the inspection of all ships and cargo, and the continued closure of other ports such as Mykolaiv. These concerns notwithstanding, even a slow and partial resumption of exports would ease global supply concerns and result in downward pressure on global prices.

FAO’s global food price index declined slightly by 2.3 percent from May to June, marking the third consecutive month of decline. This was driven by a 7.6 decline in the vegetable oil price index, a 4.1 percent decline in the cereal price index, and a 2.6 percent decline in the sugar price index, largely in response to seasonal increases in global supplies of grains and edible oils alongside declining demand due to high prices. Meanwhile, the dairy and meat price indices increased by 4.1 and 1.7 percent, respectively. Overall, the value of the food price index in June 2022 remained 23 percent higher than the same time last year. More recently, global prices of wheat and maize continued to decline in July to reach levels recorded prior to the Russian invasion of Ukraine, though prices remain above levels recorded last year and significantly above average. Prices of wheat and maize will likely follow seasonal trends in the coming months but remain elevated. Although upcoming harvests in the northern hemisphere and fears of a global recession are expected to ease pressure on prices, the trajectory remains uncertain and will be influenced by the success of the deal to resume Ukrainian grain exports.

The International Grains Council (IGC)’s Grains and Oilseeds Freight Index (GOFI)—a trade-weighted measure of ocean freight costs—has generally declined since late May 2022. The GOFI was 8 percent lower on average in June 2022 than in May 2022 and similar to June 2021 levels (2.6 percent higher). Declining freight rates are attributed to market sentiment alongside fears of an impending global recession, according to AMIS. However, dry bulk journey lengths and times continue to increase as supply chains adapt to the cessation of exports from the Black Sea ports. This and the need to purchase higher-priced grain is resulting in higher overall import costs for some countries previously dependent on Ukrainian commodities. High import costs, increased competition for available supplies, and, in some cases, local currency depreciation, continue to drive high and rising local food prices in many countries with large food insecure populations, such as South Sudan, Yemen, and Somalia.

Most global fertilizer prices decreased in June, except for phosphate, according to AMIS. The declines are largely attributed to not only a seasonal fall in demand at this time of year but also growing fertilizer inventories, the latter of which is driven by atypically low demand as farmers have waited to purchase fertilizer given record high prices. Overall, fertilizer prices remain significantly above prices recorded last year and even farther above five-year average levels. For example, prices of ammonia and urea across regions in June 2022 averaged 92 percent and 38 percent higher, respectively, than prices at the same time last year. Significantly elevated fertilizer prices are straining agricultural livelihoods in many countries with high concern for food security—such as Nigeria, Kenya, and Burkina Faso—and will likely result in declining crop production levels in the coming season.