Natalia Shpygotska, a senior analyst at Dragon Capital, has commented on how the war in Ukraine will affect the country’s agricultural markets, as well as global ones.
The war in Ukraine is disrupting global food supply chains and fueling skyrocketing prices, say economists, as well as UN Secretary General Antonio Guterres.
After all, Ukraine provides more than half of all world trade in sunflower oil and has strong positions in wheat and corn. Now, the impossibility of delivering the usual volumes of products will become a serious challenge for the world. Therefore, the UN already fears a "hurricane of hunger" and a "collapse of the global food system."
In an interview with NV, Shpygotska explained the real situation on the market.
- Tell us how today, according to your observations, the war unleashed by Russia against Ukraine has affected world markets, given the key positions of Ukrainian agricultural exports?
- There is such a cliché that Ukraine is the breadbasket of Europe. Indeed, Ukraine occupies one of the key positions in the world in terms of exports, providing 50% of the sunflower oil on the world market (for comparison: Russia – up to 30%), wheat – up to 12% (Russia – 18%), and as for corn, Ukraine has 15 −17%.
World markets have begun to take into account the potential risks of military escalation from Russia since the end of 2021, when the United States and world media began to talk about these risks. All this was partially reflected, first of all, in the prices of wheat.
After all, Ukraine and Russia together provide about 30% of world wheat exports. Therefore, the markets already then began to expect complications for the international trade of these goods. Military drills in the Black Sea became one of the harbingers of this when the main trade routes in the Black Sea were changed. Since Feb. 24, this has all become a fact.
Ukrainian ports of the Black and Azov Seas do not ship all categories of goods. The countries of North Africa, the Middle East and Asia are our main importers. They saw the risks and tried to contract as much wheat as possible before the war began. For example, Egypt and other countries. They tried in every possible way to take care of their own food security. Therefore, our main importers have formed stocks for several months, and there has not yet been an acute food crisis. But the longer ports remain blocked, the more risks it will pose to world trade.
Ukrainian ports are not working, but Russian ports are working, such as Taman, Novorossiysk and others. Importers and transport companies suspended the purchase of wheat from Russia for a while due to the outbreak of war. But the volumes of grain exports from Russia are gradually recovering, although exporters had to reorient themselves to the supply of grain in small batches, because finding a ship for a large batch has become much more difficult due to the sanctions.
What the markets have already reacted to is Ukraine's inability to export grain stocks from last year's record harvest. The longer the war drags on, the more attention shifts to the risks of the new crop we have to harvest this year. This is winter wheat sown in the autumn, which should be fed and harvested in the summer, as well as the opportunity to sow spring crops. That is, the prices for wheat and corn on world markets do not yet reflect the risks that Ukraine may not have a harvest this year.
- There are estimates according to which more than 400 million people worldwide in some way depend on the supply of Ukrainian grain. In your opinion, which countries are most dependent on Ukrainian grain and oil, in which countries in the structure of imports does the lion's share belong to products from Ukraine?
- If we are talking about wheat supplies, Ukraine previously occupied a large part of the markets in Lebanon (more than 90% in 2020), Tunisia (more than 50%), Pakistan (more than 50%) and Libya (40%). Pakistan is already negotiating wheat imports from Russia.
The largest volumes of Ukrainian wheat have been delivered to the Egyptian market in recent years (about 3 million tons per year), however, imports from Ukraine account for only 30% in the structure of total wheat supplies to that country, while the rest (about 60%) is imported from Russia.
The situation is rather interesting with China and corn. They usually supplied themselves with these crops. But in recent years, after an outbreak of ASF (African swine fever) in China, the number of pigs has sharply decreased in the country. Later, they began to restore it, moreover, in large-scale production. And this means the construction of large industrial complexes with the development of an industrial-type diet, with classic feeds, such as meal, corn. Accordingly, the consumption of corn has increased. As a result, China's corn imports increased to 25-30 million tons per year (compared to 3-5 million tons year-over-year).
The United States and Ukraine are the key suppliers there. For example, Ukraine exported almost 8 million tons of corn to China in 2021. It is hard to say how China will reorient these supplies, whether it will reorient itself to other feed components. But the fact is that Ukraine has been one of the main suppliers of corn to China for the last two seasons.
If we are talking about sunflower oil, India has traditionally been among the largest importers in recent seasons – sunflower oil is one of the premium oils for them. Here, Ukraine was one of the largest suppliers (70% of imports), and Ukrainian oil was traditionally considered to be of higher quality that Russian.
Therefore, Ukrainian oil was given priority, and finding an alternative could become a problem (due to the fact that half of the world's exports of sunflower oil come from Ukraine). Sunflower oil does not dominate in the overall balance of oil consumption in India, because there is a lot of palm and soybean oil. But they will still have to look for alternatives to sunflower oil or increase the consumption of other oils.
- To what extent can the war and non-deliveries from Ukraine aggravate the problem of hunger in certain regions?
- It's possible, but I see the problem not only in the high dependence of certain regions on Ukrainian wheat, but in prices that will seriously increase if Ukraine drops out of the world’s suppliers. For some countries, it just might get too expensive, i.e. for countries that are already heavily dependent on food imports, this import will become much more expensive.
- How much has the price of grain and sunflower oil already increased on foreign markets since the beginning of the war, and how much can they increase further? Where is the most significant growth?
- It's difficult to predict. World prices for wheat and corn have been very volatile over the past couple of weeks. In early March, wheat prices rose to their highest level ever, to over $500 per ton. But since then, they have rolled back a little, by at least 20%.
Prices were adjusted amid the news about possible negotiations between Ukraine and Russia. This weakens the perception of risks of non-deliveries of grain from Ukraine. Corn prices have risen to their highest level since 2012, but remain at about 10% below their 2012 peaks.
Since the supply of sunflower oil from Ukraine has been suspended, so far there are no correct quotations for domestic oil, however, this is reflected in export prices for sunflower oil from Russia (over $2,200 per ton – the highest level on record), and rising prices for other types of vegetable oils.
Let me remind you that the markets are not yet taking into account the scenario in which Ukraine does not plant corn this year. Therefore, it is difficult to predict. It is difficult to say when and exactly how many crops we will be able to sow. Farmers are trying to get ready. But the situation will depend on what land is available to us.
If Ukraine has supplied about 30 million tons of corn per year to foreign markets in recent years, which is 15-17% of world exports, the question is what percentage of these volumes could disappear – a tenth, a quarter, or even more. That is, how much corn will have to be searched for in other countries. All this will result in a decrease in the volume of crop stocks around the world – both in the United States, in Brazil and other countries, which could compensate for the reduction in Ukrainian exports. Accordingly, this will lead to a reduction in the stock-to-use ratio, i.e. the global stock-to-consumption ratio. This will push prices up.
- What are the other aspects of the problem of food in the world due to the war unleashed by Russia against Ukraine?
- Ukraine has also become an increasingly prominent player in the poultry meat market, but still its share is less than 10%. On the other hand, an increase in the price of grains, and hence feeds around the world may lead to an increase in the cost of protein production – the prices will increase both for meat and dairy products.
- How do you think will Ukraine subsequently be able to fully restore its positions in the global food markets?
- I think that we will restore our positions as soon as it is possible to resume normal economic activity in Ukraine. The ratio of supply and demand will determine the price. Therefore, an additional supply will appear when Ukraine returns to world trade. This will reduce the price and we will compete with other exporters. This will attract the buyers' attention. I think that in any case they will look where they can buy cheaper, where the "transport shoulder" is more convenient. We are not going anywhere from this market. We have our own niche, and corn consumption is unlikely to fall by 15% just like that.
- What are the moods among Ukrainian farmers? What are their key challenges now?
- Despite the war, most of the farmers, at least those who now have access to their fields, have plans to start sowing. And, fortunately, Ukrainian farmers do not prepare for the sowing campaign in a few weeks. Pre-sowing processing of fields begins in autumn. Most of the farmland has already been cultivated. In addition, they tried to stock fuel, fertilizers, and seeds before sowing. Of course, the situation will differ from region to region and between different farmers. But in general, they were more or less ready for the sowing season.
Now the focus is on the weather – when it gets warm enough to start the sowing campaign, because so far the spring has been rather long and cool. This gives us some time to make decisions. And, they are also taking into account that some equipment may have been damaged as a result of hostilities, whether there is access to the fields, whether it is safe to go to the fields, whether the workers are in place or if they have been mobilized. According to my observations, however, most farmers have fuel, at least to sow. But the issue of fuel will definitely arise again when it is necessary to fertilize the farmland and spray pesticides.
- How much of the crop did exporters manage to take out this season before the start of the full-scale invasion of Russia? How do you evaluate domestic food supplies?
- From the beginning of the season until Feb. 23, Ukraine exported a total of 43 million tons of grain, which is almost 40% more y-o-y, thanks to the record harvest. Of the total volume, we exported almost 18 million tons of wheat out of the 25.3 million tons planned for this season. We also exported about 19 million tons of corn. Deliveries were suspended and we did not have time to export everything that we planned.
According to the estimates of the Ministry of Agrarian Policy and Food of Ukraine, the stocks of these main crops in Ukraine amount to 6 million tons of wheat and 15 million tons of corn. With annual domestic wheat consumption at about 8 million tons, current stocks of crops are more than enough until the harvest of winter wheat begins (which, I remind you, has already been sown and will resume its growth after the winter). Taking into account annual consumption of corn at 7 million tons, Ukraine will have enough reserves for more than two years. At the same time, we do not take into account the possible decrease in the consumption of these crops in Ukraine due to the war. Stocks of sunflower oil and sugar are also more than enough for domestic consumption.
- And what is happening with Russian grain exports?
- Actually, their export continues, i.e. there is no ban on the export of grain yet. If it were to stop, in addition to the suspension of exports from Ukraine, it would further stir up the markets.
- Will the world refuse Russian grain?
- International companies tend to work less with Russia. However, importers have not yet refused. Only Louis Dreyfus out of the international traders has completely suspended operations in Russia.
Of course, Russian grain exports will face high cargo insurance costs, but exports will most likely continue since this is food. It's hard to give this up.
- Are there any other unobvious implications in terms of food markets that the war in Ukraine could bring to the world?
- We can also mention barley, for which Ukraine also has quite strong positions, and whose main importers include China and Saudi Arabia, who will have to look for alternative sources.
Animal feed could rise in price around the world, including both the EU, which imports a lot of corn from Ukraine, and the United States and South America, key exporters, which may face rising demand and prices for corn due to reduced supplies from Ukraine. And there are also a number of niche crops that went for processing in the EU, namely rapeseed, mustard, etc. Other niche export categories from Ukraine, such as honey and berries, will likely to be reduced as well.