The Central European Grain Import Ban Extension: The Stakes and Market Response

Background

Earlier this year, Poland, Bulgaria, Hungary, and Slovakia, sought unilateral grain import bans from Ukraine, citing the threats that cheaper grain prices were hindering the business and livelihoods of their domestic farmers and agricultural producers. These measures raised concerns from other EU member states, who saw these actions as abandoning a war-torn Ukraine in its hour of need. In April, however, Poland and the other EU member states agreed to lift the ban on Ukrainian imports after a deal was reached by the European Commission to “impose temporary curbs” on Ukrainian grain imports. The measures also covered Romania, who shared the same concerns as the other member states, but never took unilateral action. The measures included curbs on wheat, maize, oilseed, and sunflower, while the commission would investigate whether to extend the curbs to other commodities such as eggs and meat. All 5 countries would also receive 100m Euros from the EU to compensate farmers.

Pressure of Extension

On July 19, Poland, along with Bulgaria, Hungary, Slovakia, and Romania, asked the EU to “extend trade curbs on Ukrainian grain amid concerns that Russia’s blockage of Black Sea shipments could put further pressure on their domestic markets.” Poland has been one of the strongest western supporters for Ukraine in its war against Russia, leading calls for solidarity as well as backing the removal of tariffs on Ukrainian foods. However, Poland is facing a highly contested election later this year, where the current right-wing government will depend on the support of farmers, a “cornerstone of its electorate”. There is likely to be strong resistance against an extension among EU member states, as many of these countries have been hit hard from sanctions on Russia and will see this as Poland and the others looking for special treatment. Diplomats from the EU have expressed their dissatisfaction with the extension, while Polish Prime Minister, Mateusz Morawiecki, has warned Brussels that the 5 countries will extend the band themselves if the EU does not comply, stating “we will be tough, determined and we will certainty defend the Polish farmers.” Last week, Russia ended its Black Sea grain deal. This places more pressure on Ukraine to identify other ways to export their grain. Western leaders have expressed that the end of the deal could exacerbate food insecurity in the global south.

What’s at Stake? 

Regarding whether or not the extension will be approved, there are three important points at stake: The upcoming Fall elections in Poland and Slovakia, denunciation from Ukraine and other EU member countries, and the livelihood of farmers in the Central European region. The import bans, along with Russia’s exit from the Black Sea Deal, have put the livelihoods of Ukrainian farmers in jeopardy. As one farmer stated, “We have some reserves so we can survive for a month or so, but if we can’t sell it’s going to be a disaster.” After 17 months of conflict in Ukraine, which has resulted in economic hardship for the country, farmers would feel the brunt of the extension. On the other hand, an end to the extension would cause negative repercussions to the farmers of the 5 countries who continue to push for the extension of the ban. Poland and Slovakia are scheduled to hold parliamentary elections later this year, with both ruling parties of each country greatly needing the support of their rural farmers. Poland’s Law and Justice Party (PiS) is campaigning for a third consecutive term in power, and the party must secure the votes of Polish farmers if they want to secure a win in the parliamentary elections. A failure to extend a ban on grains from Ukraine could cost the PiS the votes needed to secure their desired win. Other EU member states have become increasingly angry at the 5 countries looking to extend the import ban. German agricultural minister, Cem Özdemir, was angered that the 5 countries wanted to extend the import bans, despite getting €100 million in EU money to compensate their domestic farmers, stating “It’s not acceptable that states receive funds from Brussels as a form of mitigation, and then still close their borders''. Ukrainian President, Volodymyr Zelenskyy commented that "Any extension of the restrictions is absolutely unacceptable and outright non-European. Europe has the institutional capacity to act more rationally than to close a border for a particular product.” At a crucial time for European leaders to continue their unified support for Ukraine, there is little room for division and disagreements, an eventuality that would play into Moscow’s hand. 

Current and Likely Market Response

Before the import ban, it was a difficult task for Ukraine to export grain to traditional markets, in Africa and elsewhere, because of the high cost of transportation. As a result, much of the grain from Ukraine has remained in bordering countries, which initially fueled the anger from the 5 EU countries. On top of that, the initial extension of the Black Sea grain deal by Russia and Turkey reduced the demand for land routes that were set up by the EU for transporting grain. Recently, prices have increased because of Russia’s exit from the Black Sea Grain Initiative and from Russian attacks on Ukrainian shipping facilities. As a result, wheat prices soared to a five-month high, and a 2.6% increase in wheat futures trading in Chicago. In recent months, Ukrainian exports of maize, wheat, and barley to the EU have decreased because of the ban.

Source: Euronews

Though global grain supplies and markets have been sufficient, owing to plentiful harvests in Brazil and Australia, the grain export shortages from Ukraine are likely to create volatility in the price of grain. With few options for exporters, agricultural analyst Michael Magdovitz, says that Ukrainian farmers are likely to place some of their harvest into storage. This will decrease their ability to prepare for next year’s harvest, limiting Ukrainian grain production. Analysts also predict that Russia’s withdrawal from the grain deal could benefit the Russian economy, as a major grain exporter, as it is expected to hit a record high harvest this year. This allows Russia to provide free grain to African countries, who were formerly relying on grain exports from Ukraine. 

In 2014, a study authored by Fellman, Helaine and Nekhay, titled Harvest failures, temporary export restrictions and global food security: the example of limited grain exports from Russia, Ukraine and Kazakhstan, revealed that for countries like Ukraine, who export large amounts of grain, “the introduction of export restrictions could potentially result in decreases of domestic consumer prices to a level even below a situation with normal weather conditions.” The same study also discussed the 2008 export restrictions which resulted in Ukrainian wheat prices decreasing to 30% “below the world market price” and showed signs of “slower growth rate of domestic feed and milling wheat prices in the first half of the marketing year 2010/2011.” Though it might be difficult to compare previous export restrictions to the current import ban on Ukrainian grains, an extension of the ban would clearly spell long term trouble for Ukrainian grain farmers.

Solidarity Lanes and Import Bans: The Dichotomy of Ukrainian Agricultural Exports in Eastern Europe

In mid April, five eastern EU nations – Poland, Hungary, Slovakia, Romania and Bulgaria – threatened or implemented unilateral import bans on Ukrainian grain and other food products to protect their agricultural sectors. After two weeks at the bargaining table, these European Union (EU) nations struck a deal with the European Commission (EC). In return for dropping their unilateral bans, the EC adopted exceptional and temporary preventative measures on certain Ukrainian imports under the Autonomous Trade Measures Regulation. Under these import restrictions, four agricultural products – staple grains like wheat and maize, as well as rapeseed and sunflower seed – originating from Ukraine can only enter the aforementioned European nations if they are in transit to other countries. In addition to these restrictions, which are in effect from 2 May 2023 to 5 June 2023, the EC is providing €9.77 million to Bulgaria, €15.93 million to Hungary, €39.33 million to Poland, €29.73 million to Romania and €5.24 million to Slovakia to alleviate the downward price pressures proliferating within their agriculture industries. 

In response to Russia’s invasion of Ukraine and the Black Sea Blockade, the EC established EU-Ukraine Solidarity Lanes, which are alternate transport routes within the EU facilitating the export of Ukrainian agricultural products. The United Nations-brokered Black Sea Grain Initiative – which lifted this blockade and was recently extended for two months on May 17 – has been unstable and unreliable. Consequently, these solidarity lanes have faced an increasing influx of Ukrainian agricultural products. While these trade routes represent a lifeline for war-stricken Ukraine, they exerted immense pressure on eastern European agricultural markets. Rather than simply transiting through these five ‘frontline’ nations, Ukrainian grain flooded their markets, creating a supply glut that jeopardised their domestic farmers' livelihoods (See Figure 1). Prices plummeted while supply skyrocketed. With the summer harvest ahead, the situation reached a tipping point, hence the threats and enactments of unilateral bans.

Figure 1. Imports of Cereals into Frontline Member States. Graph and data produced by the EC’s Directorate-General Taxation and Customs Union’s Surveillance System.

While protectionist sentiment sprouted from within the EU, it rapidly spread; calls to unilaterally ban Ukrainian grain imports emerged and gained traction within Moldova, Ukraine’s south-western neighbour. Specifically, the Moldovan Agriculture Minister proposed a plan to apply the EC’s measures while the farmers union released a statement calling for an import ban, citing a shortage in storage capacity for its summer grain harvest set to arrive in roughly one month. Alexander Slusari, the head of the Farmers’ Power Association, stated the following: “If Moldova does not restrict grain imports from Ukraine with its stocks of 10 million tonnes, it will be deposited in Moldovan silos and we will face a problem when we do not have storage for the new harvest.” 

While this initial knee-jerk reaction within Moldova has dissipated largely due to retaliatory threats from Ukraine, the Moldovan affair and the ‘frontline fives’ import bans affirm the growing sentiment and empowerment within eastern Europe to abandon Kyiv when it is most in need. As Ukrainian Deputy Minister Olga Stefanishyna has stated, the “flow of Ukrainian agro-export is a matter of survival for the Ukrainian economy” amidst the full-scale Russian war of aggression. Due to the fragility of the Black Sea deal and the preventive measures’ looming June 5 expiry date, the EC should consider further financial or legislative measures to appease these agitated EU nations and ensure the flow of Ukrainian grain goes unchecked. 

Extension of the Ukraine Black Sea Grain Initiative: Impact on Global Food Supply Chains

Since the beginning of the Russian invasion of Ukraine in February 2022, Ukrainian grain exports have been severely disrupted. Russian military vessels were carrying out a blockade of Ukrainian ports in the Black Sea for four months. On July 22 2022, an agreement was signed between Russia and Ukraine, mediated by the United Nations and Turkey, to maintain a safe maritime humanitarian corridor in the Black Sea, also known as the Black Sea Grain Initiative. Since then, about 900 ships carrying grain and other food items have departed from the Ukrainian ports of Chornomorsk, Odessa, and Yuzhny/Pivdennyi. When the time came of the end of the original deal, Ukrainian President Volodymyr Zelensky and the UN Secretary-General António Guterres both called for an extension of the deal, thereby enabling Russian and Ukrainian wheat and fertilisers to be exported through the Black Sea. 

Initially, Ukraine and Russia had signed the deal for an initial 120 days last July, thereby averting a possible global food crisis. A subsequent November extension to the Black Sea Grain Initiative for an additional four months was due to expire on March 18, 2021, unless it was extended. While the UN and Ukrainian government backed the extension, the Kremlin was unhappy with specific provisions of the deal, thereby renewing fears of grain traders regarding potential risks to supplies and the potential increase in global grain prices. On March 18, 2023, the Ukrainian Deputy Prime Minister elucidated that the deal had been extended for 120 days. However, Moscow reckoned that it had agreed to a 60-day extension only, and a Russian Foreign Ministry letter to the UN said that the country was only willing to extend beyond the stated 60 days in the face of ‘tangible progress' towards unblocking flows of Russian food and fertilisers to world markets. The Turkish President, Recep Tayyip Erdogan, confirmed the rollover of the deal but did not comment on the exact duration of the extension.

As of March 2023, over 23 million tonnes of grain and other foodstuffs have been exported via the Black Sea Grain Initiative. Approximately 49 per-cent of the cargo constituted maize, the grain which was most affected by blockages in Ukrainian granaries at the start of the war, i.e. (75% of the 20 million tonnes of grain stored). It had to be displaced quickly to make room for the summer harvest. Wheat constituted 28 per-cent, sunflower products 11 per-cent and others 12 per-cent. Over 65 per-cent of the wheat exported through the Black Sea Grain Initiative went to developing countries. Maize was shipped to both developing and developed countries almost equally. 63 per-cent of wheat was exported to developing countries and 35 per-cent to developed countries. So far, approximately 456,000 tonnes of wheat departed Ukrainian ports to reach Ethiopia, Yemen, Djibouti, Somalia, and Afghanistan. The EU is a major global producer and exporter of wheat. In 2022, according to estimates, the EU exported approximately 36 million tonnes of soft wheat to Algeria, Morocco, Egypt, Pakistan, Nigeria and others. The Russian invasion of Ukraine caused a significant surge in food prices in global markets; the prices of particular grains rose steeply. The impact on price and the types of grain which have been exported through the Black Sea Grain Initiative is made available by an infographic published by the the Council of the European Union.

The extension of the deal is a significant success. Grain traders were concerned about the effects on global food prices and what it would imply for Ukraine’s summer wheat harvest had it not been extended. Shipping industry Representatives also appreciated the smooth functioning of the grain corridor. They feared that any end to the agreement would lead to the instantaneous stopping of vessels travelling to the Black Sea. Guy Platten, the Secretary General of the International Chamber of Shipping, elucidated that while the corridor had been a great success, any failure in a roll-over would have caused significant concern for shipping companies, who would not want to endanger their vessels and crew and would find it difficult to obtain insurance. 

Market experts had also shared the fears that at a time when developing countries like Pakistan have been impacted by their own fair share of climate catastrophes like floods, leading to a massive destruction of crops, surge in energy prices as well as shocks to global supply chains due to the Russian invasion of Ukraine and high levels of inflation, a shock to grain exports, and subsequent rises in food prices would lead to a significant food crisis. Even in the developed world, for instance, in the EU, amid the cost of the living crisis and supply side shocks, higher global food prices would make essential edible items too expensive for people. Thus, the renewal of the agreement has been deemed a significant achievement.

Before the war, exports from Russia and Ukraine constituted about 30 per-cent of the global food trade. Between 5m to 6m tonnes of grain were exported each month from Ukraine’s seaports, according to the International Grains Council (IGC). The volume carried by ships via the grain corridor gained momentum towards the end of 2022, as per the Executive Director of the IGC, i.e. a very impressive level of export. In November and December 2022, Ukraine was close to approximately the same level as before the war in terms of exports by sea plus inland. While exports had slightly reduced in January and February 2023 due to poor weather, Ukrainian power outages affecting port facilities and delays in grain inspection delays, however, the overall success of the shipments of essential wheat, maize, oil seeds and barley from the Black Sea since August 2022 to countries reliant on grain imports had led to a fall of 30 per-cent in global wheat prices since its June peak. Thus, the 60-day extension of the agreement was widely praised and calmed fears of potential after effects on a wide range of industries and food prices.

Despite Kremlin’s concerns, it is likely that the UN and Turkey would mediate to have the agreement extended beyond the 60-day period and that Russia would agree to that because both Ukraine and Russia export considerable amounts of world’s grain and fertiliser, together supplying approximately 28 per-cent of global traded wheat and 75 per-cent of sunflower oil during peacetime. Moreover, as of 18 March, the UN Secretary General was adamant to seek ways to unblock Russian food and fertiliser shipments, which were blocked by sanctions targeting Russian oligarchs and the state agricultural bank. The Kremlin blames these sanctions for the ongoing food insecurity in the Global South. In the coming days, we may see easing of some sanctions that target Russian food exports, while overall sanctions may persist.

Providing for the Peninsula

This collaborative research paper by London Politica’s Global Commodities Watch and Ukraine Watch sheds light on the critical infrastructure for the supply of Russian water, fuel and military equipment through and for Crimea and investigates how these may be affected by pressure from Ukrainian forces in the months to come.