KANSAS CITY, MISSOURI, US — Perhaps the most surprising aspect of Russia’s July 17 announcement that it was suspending its participation in the Black Sea Grain Initiative corridor was the market’s reaction to the news. Wheat prices initially soared higher after the news broke in the pre-trading hours but reversed course and fell $7.20 during yesterday’s CBOT trading session, opening at $6.61 per bushel and closing 1% lower at $6.53.

There are several theories as to why this occurred. Unlike when Russia first invaded Ukraine in February 2022 and blockaded the country’s Black Sea ports for the first five months of the conflict, the psychological impact of the decision was minimal since it had been speculated for weeks that Russia would pull out of the deal, which over the last year had enabled Ukraine to export more than 33 million tonnes of grain and foodstuffs. Buyers also had plenty of time to purchase wheat ahead of the July 17 deadline, which leaves them well stocked for the immediate future.

Dan Basse, president of Chicago, Illinois, US-based AgResource Company and a veteran global grain market analyst, cited another potential factor in the market’s muted reaction to Russia’s decision, noting there has been speculation that Turkey and EU countries may provide military cover to move grain safely through the corridor.

“While Russia may pledge to get out of the deal, are others going to step in here?” Basse said. “Are the Turks going to provide military convoys to get grain out of the corridor? Those are possibilities, and I think the market also may be understanding that there are other export avenues for Ukraine.”

The Danube River, for instance, increased its grain export capacity from several hundred thousand tonnes per month before the war began 17 months ago to more than 2 million tonnes today.

“If indeed the corridor stayed down — I think that’s the big question, if the corridor went out of commission for the next 12 months — it would raise the price to Ukrainian farmers in terms of logistics and cost to get grain to market,” Basse said. “But because Ukraine has smaller carry-in stocks, and because their crops are going to be far smaller this year, I think they would be able to export through Eastern Europe and the Danube (River) and get out some 3 million tonnes per month. That would allow them to rid themselves of any crop production this year.

“Unless the Danube gets plugged, the opportunity for Ukraine to still get grain out is going to be OK. In the European Union, because of weather adversities, they may need a fair portion of the Ukrainian corn crop anyway. So, if Ukraine’s corn crop ends up being 20 million tonnes, and exports end up being 12 million tonnes, probably 10 million of those tonnes could flow into the EU.”

Through May, about 60% of Ukraine’s wheat and corn exports were shipped via seaports during the 2022-23 marketing year ended June 30, with 46% of barley going that route, according to UkrAgroConsult’s Black Sea Grain Report.

Developing countries, particularly in Africa and the Middle East, traditionally have been dependent on affordable wheat from Ukraine to feed its people. The Russia-Ukraine conflict has destabilized the market in terms of price and supply in those regions.

“In terms of wheat, (Ukraine) is still needed in the world wheat market, and it would have an adverse impact for portions of central Africa and Sub-Saharan Africa,” Basse said. “The cost would be higher, but I don’t think tonnages from what they would have put out through the corridor are going to be disrupted all that much.

“I do think there are workarounds that the Ukrainians can find with their smaller harvest this year. Unfortunately, it will cost more money logistically speaking, so the price of that grain may be more expensive in Sub-Saharan Africa or North Africa. But I still think there are avenues for that grain to make it out of Ukraine. They’ve been working on these avenues, not just in the last three months, but really going backwards the last six to nine months. We now have export channels down the Danube, and the Constanta (port) has been exporting more grain.”

While buyers may be equipped to weather the storm, a lengthy suspension of the grain deal would devastate Ukrainian farmers, who already have been battered by the war’s impact, high inflation on inputs such as fuel and fertilizer, and a significant increase in transportation costs and logistical challenges, Basse said.

“You wonder how long they keep operating without a financial lifeline, because there’s no financing available,” Basse said. “I know some Ukrainian aid agencies are going around the US and Europe, trying to raise money. But increasingly, the Ukrainian farmer is the one that’s going to suffer, both large and small. Maybe the smaller ones can hold on better than the larger ones, but it’s a question of capital. The longer this war goes on, the more adversely it impacts Ukrainian agriculture.

“You can probably take this year’s corn and wheat crops that are cut by 30% to 40% from last year and cut them by a third again. Increasingly, this is wearing on the Ukrainian farmer.”

The Foreign Agricultural Service of the US Department of Agriculture projects wheat output in Ukraine to decline to 17.5 million tonnes in the 2023-24 marketing year, down from the record 33 million in 2021-22. It sees exports declining to 10.5 million tonnes from 16.8 million in 2022-23 and 18.9 million the year prior to that.

The USDA forecast corn production to dip slightly to 25 million tonnes from 27 million, while it expects exports to be slashed to 19.5 million this year from 28 million tonnes in 2022-23.

Tanner Ehmke, lead economist, grains and oilseeds, CoBank, noted in a social media post that “the announcement comes at a low point in the shipping season, which buys time for Ukraine to work out alternative routes before traffic picks up this fall. Global demand can easily shift to alternative origins: Russian wheat shipments remain record large, while Brazil's safrihna corn crop is also record large.”

China being the top destination for ag commodities via the Black Sea portal, and Turkey being third, also works against Russia, Ehmke said.

“Since the last extension of the agreement two months ago, things have changed politically,” he said. “Turkey has voted to approve Sweden joining NATO, and Vladimir Putin’s power has weakened since the Wagner Group’s mutiny. Putin may be desperate and angry at Turkey, but he still needs China’s political support. Even if the deal is officially over, Putin won’t sink any boats headed for China, which takes nearly a quarter of all of Ukraine’s shipments via the Black Sea Grain Initiative (8 million tonnes out of 33 million shipped in the past year). 

“It will be hard for the Russian navy to find out which boats to sink and which ones to let pass. Realizing that its influence has waned and that it can’t afford to upset China by accidentally sinking one of their boats, Russia may just end up looking the other way.”

Wheat prices did rebound on July 18, rising 10¢ to $6.64 per bushel in pre-trading hours, returning to just above the closing price on July 14. The surge was perhaps partially due to news of an overnight drone attack by Russia on the Port of Odessa. No grain infrastructure was damaged, but several other facilities were, according to media reports.