Export volumes decline despite extension of Black Sea grain deal

The Russian winter offensive largely failed to secure significant territorial gains. On the other hand, following successful Ukrainian counteroffensives in Kherson and Kharkiv oblasts in the fall of 2022, the size of Russian-controlled Ukrainian territory has declined by 33 percent as of May 2023 compared to the peak of the 2022 invasion. This has been facilitated by significant support by western partners in the form of military aid packages and advanced weapon systems. The war in Ukraine is expected to continue throughout 2023, and very likely beyond, as both Russia and Ukraine continue to demand pre-conditions for peace talks that are unacceptable to the other side. Direct conflict will likely continue to impact eastern areas (especially Donetsk and Luhansk oblasts) and, increasingly, southern areas (Kherson and Zaporizhzhia oblasts) as the Ukrainian counteroffensive commences imminently.

The frequency of Russian airstrikes on Ukrainian civil and energy infrastructure and urban centers has increased from January to May 2023. According to Ukrainian media reports, Russian missile and drone strikes were reported on only three days in January 2023, compared to 21 days in May 2023. However, an increasing number of Russian drones and missiles have been intercepted by Ukrainian air defenses following recent deliveries of improved missile defense systems, with reports of power outages becoming less frequent in recent months. While Russian missile and drone strikes on civil and energy infrastructure and on urban areas will persist throughout the projection period through January 2024, the frequency of strikes and severity of impacts will likely decrease from peak levels observed in May due to improved Ukrainian defense systems and challenges in restocking Russian missile system stocks.

In May 2023, FEWS NET commissioned the data collection firm Premise to conduct a mobile phone survey to assess market functionality in Ukraine through the self-reported experiences and observations of consumers across the country. The survey reached just over 1,800 participants. Of all participants, 86.7 percent reported that food items were generally available where they shopped, with the remaining 13.4 percent reporting some shortages or reduced variety/quality. As has been the case throughout the conflict, reduced food availability was most commonly reported in eastern cities like Mariupol and Melitopol, both of which remain under Russian control. The latest JMMI update from the Cash Working Group in April 2023 provides further evidence that food availability is high across the country as supply chains have generally stabilized. Nevertheless, rising food prices continue to affect food security amongst Ukraine’s poorest and most vulnerable households, especially in conflict-affected and Russian-controlled areas where the reach of Ukrainian social and humanitarian support is constrained and the provision of Russian support is limited. However, the pace of inflation continues to slow, with the annual inflation rate falling to 15.3 percent in May. The National Bank of Ukraine forecasts that the inflation rate will stabilize around this level through early 2024.

At the end of May, the IMF upgraded expectations for Ukrainian economic growth in 2023, with real GDP growth now anticipated to be in the range of 1 to 3 percent, up from the previous range of -3 to 1 percent, given continuous adaptation of the economy to wartime conditions. While most Ukrainians are expected to be earning enough income and/or receiving sufficient government and humanitarian support to meet their needs, poor and vulnerable households (particularly those with elderly or disabled household heads) in conflict-affected and Russian-held areas in eastern and southern Ukraine likely continue to face difficulty receiving social welfare payments (including pension payments) and humanitarian assistance. Worst-affected households in these areas are expected to face food consumption gaps, indicative of Crisis (IPC Phase 3) outcomes, during periods of time when access is highly restricted.

On May 17, the Black Sea Safe Grain Corridor deal was extended for another 60 days through July 18. However, uncertainty around the future of exports via the Black Sea corridor has driven a steady decline in grain export volumes since March. According to one ship charterer quoted in news reports, two-month extension periods are not sufficient for market actors to plan ahead. Furthermore, Russia has reportedly blocked the movement of ships from Pivdennyi port by refusing to inspect them, resulting in a further sharp decline in weekly exports to levels not seen since August 2022. As of May 26, 2023, – near the end of the July 2022-June 2023 marketing year – export volumes of grains and pulses totaled 44.8 million tons, similar to (4 percent less than) the below-normal levels observed in the same period of the 2021/2022 marketing year (which saw exports plummet in March 2022 following the invasion).

The spring sowing campaign is nearing its conclusion in late May, with an estimated 12.25 million hectares of land sown with spring crops. Ukraine’s Ministry of Agriculture (MoA) now expects total area sown under spring crops to reach around 13.5 million hectares, which is slightly lower than the MoA’s earlier projections of 14 million hectares due to slow progress in demining territory reclaimed from Russia.¹ Meanwhile, winter cereals (mostly wheat) are nearing maturation. While most of the Ukrainian winter wheat crop is reported to be in good condition as of the end of May, hot and dry weather during grain-filling stages could reduce yields by as much as 15-20 percent. The Ukrainian government estimates that crop production in 2023 could total around 44.5 million tons, down from 53 million tons in 2022 and significantly lower than the record 86 million tons harvested in 2021.

Despite Ukraine’s below-average crop production prospects in 2023, export capacity – especially the export of goods through the Black Sea corridor – will remain the key determinant of Ukraine’s contribution to global supply. By the time the current 2022/2023 marketing year concludes at the end of June, the Ukrainian Agrarian Council estimates that around 10 million tons of carryover grain stocks will remain in the country from the preceding season. Although this is a notable decline from previous high stock levels that had accumulated due to export bottlenecks, the imminent start of the new harvest in June will further add to available stocks. As a result, even below-average levels of Ukrainian grain production in 2023 will supply enough grain to facilitate exports at levels similar to the peak levels reached in January to March 2023 throughout the remainder of the year, if not well beyond.

While Ukraine continues to be an important contributor to the global supply of grain, several other countries are much more significant contributors. As of USDA’s latest available analysis released in May 2023, global wheat trade in the 2023/24 marketing year is now forecast to total 209.7 million metric tons (MMT), which is similar to the prior two years; the top exporters include: Russia (45.5 MMT), the EU (38 MMT), Canada (27.5 MMT), Australia (21 MMT), the United States (19.3 MMT), Argentina (13.5 MMT), and Ukraine (10 MMT). Global maize trade is projected to total 195.3 MMT, which is higher than last year (175.4 MMT) but less than in the 2021/22 marketing year (206.2 MMT), with the top exporters being: Brazil (55 MMT), Argentina (40.5 MMT), and Ukraine (16.5 MMT). As such, while the sensitive global market will continue to react to news concerning future supplies of wheat and maize from Ukraine, with global prices increasing or decreasing temporarily in response, Ukrainian export levels are just one of many factors – and not the most important factor – that will determine the balance of global supply and demand and, ultimately, global price levels of key agricultural commodities.

In the most likely scenario, it is anticipated that the Safe Grain Corridor deal will continue to be extended throughout the projection period. However, an expiration of the Safe Grain Corridor deal – or a significant and prolonged drop in Ukrainian exports due to the refusal of Russian authorities to inspect ships – would put some slight sustained upward pressure on global commodity prices. If this occurs in combination with other factors that reduce expectations for global supply – such as poor weather in major grain-producing countries – or increase expectations for global demand, then global food prices could rise again in late 2023. The degree of any price increases would also be influenced (exacerbated or mitigated) by typical seasonal trends coinciding with global harvest times; typically, wheat prices decline in the spring through around July before increasing again thereafter through the winter, while maize prices tend to peak around July and decline through the end of the year.