Russia suspended its participation in a deal that allowed Ukraine to export grain from its Black Sea ports last week and also announced that vessels approaching Ukrainian Black Sea ports could be considered legitimate targets.
The agreement, called the Black Sea Grain Initiative, was put in place in July 2022 and allowed a safe corridor for Ukraine’s grain exports.
The deal has been crucial in alleviating global food shortages that had pushed wheat prices to surge 60 per cent to 14-year highs, according to the US Department of Agriculture. For Egypt, which for the five years prior to the Russia-Ukraine war imported around 20 per cent of its wheat from Ukraine, the deal was crucial.
After the deal, prices dropped by more than 50 per cent, from highs of over $400 per ton. However, with the deal now on hold, prices are likely to rise. On 19 July, the day following the suspension of the agreement, the BBC reported that wheat prices on European stock exchanges had soared by 8.2 per cent from the previous day to $284 per ton, while corn prices were up 5.4 per cent.
Egypt’s minister of supply said he was not happy with Russia’s pulling out of the deal and hoped it would reconsider its position. He added that Egypt would continue importing Ukrainian wheat via the European route.
Prices will not reach the peak witnessed in June 2022, but the added element of risk will see grain prices more broadly push higher in the short term, Steven Burke, an economist at CRM AgriCommodities, an agricultural consultancy, told Al-Ahram Weekly.
He said that global supplies were better equipped to deal with a supply shock relative to the start of the war, and speculative investors are less interested in grains than they were when the war broke out.
However, in the longer term, transportation costs will move higher in Ukraine, making wheat and rapeseed less competitive than other crops, which could lead to falling areas planted with wheat and less wheat available for export.
In the short term, there is no risk of not getting wheat out of Ukraine as there are alternative options, but those are more costly and time-dependent, Burke said.
Egyptian importers will face higher costs in the short term, leading to renewed food price inflation, he said.
Egypt’s inflation is already high on the back of a weak currency. The annual headline inflation rate recorded 35.7 per cent in June, compared to 32.7 per cent in May, the highest since the summer of 2017.
An alternative route for wheat exports to the Black Sea ports are the Danube ports close to Romania, said Burke. However, he noted that there are no guarantees that the Danube ports will be able to safely ship grains or be able to secure financing and insurance to run a consistent fleet of ships out of the Danube.
On Monday, Russia attacked infrastructure along the Danube, destroying grain warehouses.
Another alternative would see grains shipped by railway into the EU, which is again costly and timely, Burke said. Moreover, as Ukrainian grains flow into Poland, Hungary, and Slovakia, domestic prices fall, making EU growers worse off. This leads to a political backlash from EU members neighbouring Ukraine, which could disrupt grain flows.
According to Irina Tsukerman, president of Scarab Rising, a media and security strategic advisory group, another alternative is the Romanian port of Constanta, though this may have to increase capacity to meet the increased demand.
It remains to be seen whether Russia will return quickly to the grain deal as it has done in the past after brief disruptions, Tsukerman told the Weekly.
In an article published on Monday, Russian President Vladimir Putin said the deal had lost its meaning and that Russian conditions for extending it had not been met.
The impact of the Russian pull-out from the deal will cause financial pain, lead to fewer people being able to afford basic necessities, and could lead to a spike in poverty and health issues, Tsukerman said.
Egypt has already been hard hit by factors including climate conditions, the migration of Sudanese refugees, rising commodity prices, and population growth, she said. “Alternatives to this grain deal are not widely and immediately available. Food security is central to stability in Egypt,” she stressed.
If the problem persists, other wheat providers may step in and develop alternative solutions, but transportation costs from countries such as the US will remain substantial and offset any gains in price differentials.
Meanwhile, Russia has tried to send its reassurances. “We understand the concerns our African friends may have,” Russian Deputy Foreign Minister Sergey Vershinin told journalists, according to French news agency AFP.
“The countries in need in the course of contacts with us and in the course of the upcoming Russia-Africa Summit will naturally receive the necessary assurances regarding their needs for agricultural products and first of all for grain,” he added.
Burke warned that global wheat supplies, another factor that could impact prices, are extremely tight. It would only take one or two disappointing harvests by top producers to see the market fall into a deficit during the next crop year, he noted.
While weather conditions are faring a bit better than last year, especially in parts of Europe and the Americas, volatile and extreme weather events are becoming more frequent, which means that until the harvest is completed it is not sure what yields will be.
He recommended that Egyptian growers should be looking to invest in yield potential rather than area expansion. “It is critically important to boost the local crop, reducing reliance on international supplies,” he stressed, explaining that “the floor on global grain markets is rising due to a global shift into the use of biofuels.”
The last decade of global grain production has confirmed that supply is becoming increasingly volatile, he said. This is why it is imperative to build up stocks when prices are cheap, while building capital is just as important.
“A rainy-day fund can be used to hedge the national demand for critical food supplies when global production is tight,” Burke said. Ultimately, grain supplies are becoming more volatile and greater emphasis on ensuring an ample amount of funds or supplies is needed to limit price swings.
Tsukerman recommended that in order to meet demand and lower prices, Egypt needs to adopt the most efficient wheat growth and irrigation techniques with assistance from other countries or in collaboration with East African neighbours.
It also needs to address issues such as energy related concerns and water availability, she said.
Over the past few years, the government has been attempting to increase local wheat production by offering farmers attractive delivery prices as well as expanding cultivation on new land.
But despite a 36 per cent local production increase in 12 years, Tsukerman said, Egypt remains one of the top wheat importers in the world largely because of population growth.
Egypt’s imports of wheat average around 62 million metric tons (MMT) annually. Imports are needed to cover around half of the country’s needs.
Egypt has also diversified its sources for imported wheat. Last year it imported Indian wheat for the first time.
But according to Tsukerman, the sharp rise in prices reveals that this diversification strategy has had a limited impact due to the fact that prices are high overall, additional sources of wheat might be more expensive than Russian and Ukrainian wheat, and other factors offset any gains, such as transportation costs and other related expenses.
“Diversifying the sources of wheat can ensure stability of supply but not necessarily lower costs,” she said.
* A version of this article appears in print in the 27 July, 2023 edition of Al-Ahram Weekly