Ukraine's Grain Export Success Placates Market Despite Russia's Threats

Ukraine has shipped significantly more grain over the last several months than originally expected, especially corn, easing worries that were prominent last year over the country’s export program.

But Russia now claims it will not support the Black Sea grain deal beyond May 18 due to obstacles on its own food and fertilizer exports. That deal was signed last July to allow shipments from Ukrainian seaports, overseen jointly by Russia, Ukraine, Turkey and the United Nations.

Traders seem more focused on the grain deal’s recent success than the risk to Ukrainian exports should Russia cease to cooperate. Chicago wheat futures on Tuesday hit their lowest levels since July 2021, and Euronext wheat sits at 19-month lows this week.

That sentiment is not necessarily unreasonable given how poor initial expectations were.

For example, the U.S. Department of Agriculture currently forecasts 2022-23 Ukrainian wheat and corn exports at 14.5 million and 25.5 million tonnes, up from a respective 10 million and 9 million predicted last July just before the deal’s launch.

That compares with December predictions of wheat at 12.5 million tonnes and corn at 17.5 million.

The export deficit versus year-ago is becoming much less alarming. As of Monday, Ukraine’s 2022-23 grain exports were down about 11% from the same date last year compared with margins of 18% in late March and 27% in late February.

The severe limitation of exports at this time last year is not the only explanation for the narrowing deficit. Export numbers published by Ukraine’s ministry suggest both wheat and corn exports in the last couple of months have been above recent years’ averages.

But that could change in the 2023-24 season, beginning July 1, as Ukrainian grain crops are expected to shrink from last year on smaller planted area. Oilseeds are seen benefitting from lighter grain plantings.

Production vs consumption
A look at Ukraine’s corn balance sheet reveals the critical role of leftover stocks from the prior harvest in the country’s export potential this season. According to USDA data, Ukrainian corn exports in 2022-23 will represent 94% of the year’s corn harvest.

Normally that number would be below 80%, though it reached a high of 85% four years ago following a huge record harvest.

The unsustainability of such a high export rate is also evident by the fact that Ukraine’s total corn use in 2022-23 is seen topping production by 4.7 million tonnes, or 17% of the total harvest. That had never been more than 2% in previous years, and it implies a smaller corn crop this year could lead to a relatively larger drop in exports.

The same may happen with next year’s wheat shipments. Total wheat use is seen exceeding the crop size by 12% in 2022-23, a 10-year high. Exports are seen accounting for about 69% of the 2022-23 harvest versus a five-year, pre-war average around 67%.

Dissatisfying destinations 
Russia has complained since the start of the grain deal that not enough Ukrainian supplies are being shipped to poor countries. Putting potential price barriers aside, that claim is somewhat accurate, but it likely ignores re-exported products.

Recently published USDA data shows Ukraine shipped 8.4 million tonnes of wheat between July and December 2022, down 47% on the same period a year earlier. Some 49% of that 2022 volume went to European Union countries versus 2% in the same time frame in 2021.

Other destinations experienced the opposite. African nations represented the largest share of Ukrainian wheat exports between July and December 2021 at 34%, but shipments over the same period in 2022 were 80% lighter. Shipments to all Asian destinations were down more than 80%, also.

Before Ukrainian seaports resumed operations in August, overland transport through Europe was the primary route for Ukrainian goods. That movement has continued, so larger volumes of Ukrainian grain into Europe is unsurprising. The USDA figures do not separate re-exported wheat, but the agency mentioned Romania may have trans-shipped most of the arrivals.

Just over half of the wheat exports to EU nations between July and December 2022 were to neighboring Romania, Poland, Hungary or Slovakia, still potentially suggesting an unusual rise of exports to the bloc.

The inflow of cheap Ukrainian grain has driven down prices in European neighbors, angering farmers and leading some countries to propose bans on Ukrainian goods. The EU last week proposed compensation packages for farmers as well as restrictions on Ukrainian grain imports.

(Reuters - Writing by Karen Braun; Editing by Matthew Lewis. Karen Braun is a market analyst for Reuters. Views expressed above are her own.)