Explainer-Can Ukraine’s grain corridor ease the global food crisis?

Updated: Mar 15, 2023, 16:50 GMT+00:00

By Nigel Hunt and Jonathan Saul LONDON (Reuters) - It is unclear whether Moscow will extend its participation in a U.N.-backed initiative that has enabled grains to be exported from Ukraine's Black Sea ports.

Palau flagged bulker MKK1, carrying grain under UN’s Black Sea grain initiative, is towed free after running aground in Istanbul's Bosphorus

By Nigel Hunt and Jonathan Saul

LONDON (Reuters) – Russia has proposed that a U.N.-backed initiative that has enabled grains to be exported from Ukraine’s Black Sea ports should be renewed for just 60 days.

The deal to free up grain exports from Ukraine’s southern Black Sea ports, which expires later this month, has previously been renewed for 120 days and there are concerns a shorter extension could cause logistical issues.

Reached in July last year, it created a protected sea transit corridor and was designed to alleviate global food shortages by allowing exports to resume from three ports in Ukraine, a major producer of grains and oilseeds.

Here are some of the issues:

What has been exported?

Under the pact to create a safe shipping channel, some 24.6 million tonnes of agricultural products have been shipped, including 12.2 million tonnes of corn.

Wheat shipments have reached 6.7 million tonnes. Other commodities shipped include rapeseed, sunflower oil, sunflower meal and barley.

The leading destinations have been China (5.4 million tonnes), Spain (4.3 million) and Turkey (2.7 million).

For a full breakdown of the countries and quantities exported:

How might the agreement change?

The main potential change to the agreement is a shortening in the length of the renewal to 60 days from 120 days, a switch that is supported by Russia but opposed by Ukraine.

A shorter period is significant as there is often a slowdown in shipments in the period leading up to the renewal date due to the potential risk that the deal may collapse.

If the deal collapses, more ships in the region could be stranded.

There are still up to 60 commercial ships stuck around Ukrainian ports from more than 90 vessels – many with food cargoes onboard – in February 2022, when Russia invaded Ukraine, industry sources said.

It is likely therefore that a shorter renewal period will effectively mean a lower volume of shipments of grains and oilseeds out of Ukraine through the corridor as companies consider whether their shipments may get stuck.

Shipping companies are already holding off from charters through the corridor until more is known over the outcome of the current talks, industry sources said.

Ukraine has said it would like the deal to be extended for at least one year and the addition of the port of Mykolaiv.

The three ports involved in the deal – Odesa, Chornomorskand Pivdennyi – have the combined capacity to ship around 3million tonnes a month.

Mykolaiv was Ukraine’s second-largest grain terminal according to 2021 shipment data so its addition would allow a much larger volume of grains and oilseeds to be shipped.

Russia has said it opposes the expansion of the deal until concrete steps are taken to unblock its agricultural exports.

Agricultural exports have not been explicitly targeted by sanctions, but Moscow says blocks on its payments, logistics and insurance industries are a barrier to the export of its grains and fertilisers.

Among its demands, Russia is believed to want the West to ease restrictions on state agriculture lender Rosselkhozbank, which should facilitate Russian exports.

Has it alleviated the food crisis?

Reduced shipments from major exporter Ukraine have played a role in the global food price crisis.

Other factors include the COVID-19 pandemic and climate shocks that continue to challenge agricultural production, including droughts in both Argentina and the United States.

The corridor has led to a partial recovery in shipments from Ukraine, but they remain well below pre-invasion levels and will not fully recover for the foreseeable future.

Transporting grains to and from ports there is challenging and expensive, and Ukrainian farmers have reduced sowings of crops such as wheat and corn after in many cases selling last year’s crops at a loss because domestic prices were very low.

Has it driven down global wheat prices?

Prices of wheat on the Chicago Board of Trade rosesharply following Russia’s invasion of Ukraine on Feb. 24, 2022.

They are now around pre-conflict levels as Ukraine’s ability to export millions of tonnes of wheat through the corridor helped to lower prices.

Other factors include a record crop in major exporter Russia last year, the gloomy global economic outlook and a strong dollar.

Prices for wheat-based food staples, such as bread andnoodles, are still well above pre-invasion levels in many developing countries despite the decline in Chicago futures, as weak local currencies and higher energy prices have raised costs such as transport and packaging.

What about insurance?

The Istanbul based Joint Coordination Centre, which overseesthe deal and is made up of Russian, Turkish, Ukrainian and U.N.officials, in August published procedures on theshipping channel to address the concerns of insurersand shipowners.

Insurers initially said they were willing to provide cover if there were arrangements for international navy escortsand a clear strategy to deal with sea mines.

Since then, they have created clauses for providing cover, including provisos that ships need to stay inside the corridor when transiting or risk invalidating their policies.

Following the July 22 agreement, Lloyd’s of London insurer Ascot and broker Marsh set up a marine cargo and war insurance facility for grain and food products moving out of Ukrainian Black Sea ports with $50 million cover per voyage.

The cost of overall insurance for ships sailing into Ukrainian ports – which includes separate segments of cover – is nevertheless likely to remain steep.

This has been compounded by insurers having to cover more of the risk after reinsurers at the start of this year introduced exclusions for Belarus, Russia and Ukraine, meaning more exposure for insurers and potentially less appetite to cover cargoes.

Ships that sail into one of the three Ukrainian ports under the accord are required by their charterers to pay an additional war premium, which is renewed every seven days costing thousands of dollars. If the extension is limited to 60 days it could dissuade more ship owners from chartering their vessels given the multiple costs involved and the possibility of getting stuck.

(Reporting by Nigel Hunt and Jonathan Saul in London and Pavel Polityuk in Kyiv, Editing by Angus MacSwan, Alex Richardson and Barbara Lewis)

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