International media and government assessments of the Ukraine-Russia conflict have occupied the headlines and minds of many throughout the world in recent weeks. The ongoing build-up of Russian forces along Ukraine’s border has been primarily analyzed through the lens of Russia-NATO tensions or the European energy crunch. A potential military engagement or incursion by Russia into Ukraine will not only disrupt Russian oil from reaching European consumers, but the expected harsh economic and financial sanctions on Russia in such a case could also severely curtail Moscow’s oil and gas exports to markets worldwide. If Russian energy is removed from the already tight global energy markets, then the world may be heading for a possible economic and security meltdown.
Yet, the threat to the energy markets or European security is not the only major issue at play. Commodity markets are concerned that a possible conflict in Ukraine will also greatly impact agricultural supplies. What many analysts seem to neglect is that Ukraine is one of the world’s main breadbaskets. Ranking third in wheat and fourth in corn, a conflict in Ukraine could harshly constrain Ukraine’s exports. Global commodity markets are still trying to recover from last season’s historic supply tightness, which resulted in record, multi-year high prices across all grains worldwide. The Ukraine-Russia crisis has already pushed global wheat future commodities up by 5-6% on the CME and Euronext, only exacerbating international concerns over whether Washington, Kiev, and Moscow can reach a permanent solution.
While US and EU-based commodity markets worry over the latest developments in Ukraine, as well as shortages and price hikes, primary import markets in the MENA region must now reassess their present and future options. A major conflict in Ukraine will have a debilitating effect on food security for key MENA importers. Most MENA countries depend on importing their food from abroad, and Ukraine currently exports around 40% of its annual corn and wheat production to the Middle East and Africa. Ukraine’s position is critical when considering that the US only exports 10% of its corn and wheat to those same regions. Due to wide-spread droughts in recent years, imports of wheat, corn, and other agricultural products to the MENA region have risen, leading to increased domestic food prices and sudden shortages. In addition to grains, Ukraine is also a major exporter for oilseed and rapeseed, accounting for almost half of the world’s sunflower oil exports. In 2022, experts predict that Ukraine will account for 12% of global wheat exports, 16% for corn, 18% for barley and 19% for rapeseed. For MENA countries, Ukraine is a vital partner, especially given that Ukraine’s grain exports since July 1 rose by 28% from a year ago and 6% from two years ago following a record harvest in 2021. As most shipments peak between August-September, most of Ukraine’s volumes of corn still need to be shipped.
The current military and geo-economic constellation of forces in and around Ukraine should be considered a major risk to international commodity and trade flows coming out of the area. In the face of increasing troop deployment and ongoing joint Russian-Belarus military exercises near the Ukrainian border, offshore developments have been somewhat underestimated. In this regard, the Black Sea basin is steadily becoming more of a major flashpoint.
Since the demise of the Soviet Union, Russia has had its eyes on the basin, as seen in its short war with Georgia, Crimea, and the Sea of Azov operations. The current Russian naval buildup in the Black Sea (under the premises of naval exercises) not only threatens European security, but Mediterranean and MENA security and trade flows as well, both directly and indirectly. Maritime operations on the Black Sea will put pressure on the sea-lanes and access of Black Sea riparian states, as well as interrupt regional and global energy and commodity flows. This will mainly affect some Middle Eastern countries as a possible disruption in agricultural trade and grain production in the Black Sea basin will rattle their domestic stability and economic status quo. MENA assessments should also recognize that a blockade or military operation in Ukraine will both obstruct the latter’s agricultural exports and constrain Russian exports as well. The Black Sea represents the main outlet for Ukraine and Russia’s agriculture commodities, especially grains, with around 12% of global grain trade originating in the Black Sea.
Russia and Ukraine’s combined wheat exports for the 2021-22 marketing year made up an estimated 23% of the global total (206.9 million mt). For Russia, wheat exports totaled 2.6 million mt between Jan. 1-20, down from 3.2 million mt in the previous month. Overall, since the current marketing year began July 1 and up through Jan. 20, Russian wheat exports were 21% lower year-on-year at 23 million mt. S&P Global Platts Analytics projected Russia’s MY 2021-22 wheat exports at 36.5 million mt and its wheat crop at 77.6 million mt. Ukraine shipped out 16.6 million mt wheat in MY 2021-22 as of Jan. 24, up 29% year-on-year. Between Jan. 1-24, Ukraine exported 1.2 million mt, down from 1.4 million mt in the previous month. For 2021-22, Platts Analytics forecasts that Ukraine will produce 31.2 million mt of wheat and export 22.5 million mt.
According to the U.S. Department of Agriculture, 95% of Ukraine’s grain exports are shipped out of Black Sea ports. Crops produced in southern Ukraine farms travel a short distance and are delivered to these ports by truck. Interestingly, over 90% of Ukraine’s total grain shipments are shipped out of only four ports: Mykolaiv (34%), Chornomorsk (25%), Pivdennyi (18%), and Odessa (15%). If the Russians invade and occupy eastern Ukraine, they would gain control over the Mariupol and Berdyansk ports, which account for merely 6.1% percent of Ukraine’s agricultural exports. However, it is highly likely that the Russian Black Sea fleet would enforce a naval blockade to strictly hamper Ukraine’s international trade, including its agricultural exports.
Considering that Ukraine exported 50% of its wheat to MENA in 2020, it is clear that the repercussions of a strife will be severe on the region. Lebanon and Libya rely heavily upon Ukrainian wheat, importing 50% and 43% of their nations’ wheat, respectively, while Egypt views Ukraine as its main corn supplier. Potential food crisis in these key markets are on the horizon if a conflict erupts. Other potential supplies could still be found in 2022, but the costs would be staggering. Price hikes in the Middle East would definitely follow, with current price levels already at 10-year highs in the region.
One of the main underlying catalysts for the so-called Arab uprisings and resulting civil wars and instability was a food supply crisis. As such, Ukraine’s pivotal role to the region cannot be understated. Several Middle Eastern countries could be the first victims. A fall-out in Ukraine would not only destabilize Middle Eastern nations’ food supplies, but also put strain on their societal frameworks and political powers. In this regard, analysis has shown that the first uproars in Egypt before the Arab Spring or removal of President Hosni Mubarak began shortly after Russia banned wheat exports in 2010.
At the same time, unrest and destabilization could be another lethal combination for the already constricted energy markets. The world is definitely not ready to counter the one-two punch of a Ukraine-Russia conflict and food riots in major parts of the Middle East, thereby upending the region’s vast oil/gas and energy superstructure. Overall, the situation appears to be a perfect storm in the making, one which mainstream parties have not yet fully recognized. It also is a wakeup call for governments to focus more on diversifying commodity supply or investing in non-traditional agricultural producers (Horn of Africa, Kenya, etc.) to secure a greater variety of supply in the future. Hydrocarbons and food supply risks at this moment may not only be converging factors, but also mutually destabilizing influences.