Ukraine: uncertainty despite grain corridor

Two dozen ships have left the largest Ukrainian ports in the Black Sea since 22.Leave July. On this day, an agreement was signed in Istanbul, mediated by the United Nations and Turkey, to allow grain exports from Ukraine to resume after months of blockade by Russian warships and Ukrainian sea mines. One of the first ships to leave was freighted by the UN to 23.000 tons of wheat to starving people in Ethiopia. In total, more than 600.000 tons of grain made their way to the world market, according to the interim balance sheet of the State Seaport Administration of Ukraine. The port authority's plans are ambitious: soon 100 ships a month are to leave the Ukrainian ports of Odessa, Pivdenny and Chornomorsk. But you are still miles away from that.

Shipping companies hesitate

Apart from the freighter that left for Ethiopia on behalf of the UN, only four other ships have entered the ports of Odessa region to pick up grain in accordance with newly concluded contracts. The rest were ships that had been stuck in the harbors for months before. "Things are very slow with new contracts," says Pavlo Martyshev of the Kyiv School of Economics (KSE) in an interview with DW. "Market participants don't really trust the Russians and are expecting surprises," Martyshev said, alluding to the Russian missile strike on the port of Odessa just one day after the agreement was signed.

UN Secretary-General Antonio Guterres (l.) and Turkish President Recep Tayyip Erdogan at the signing of the grain agreement in Istanbul

In an analysis for the CFE in early August, Martyshev optimistically estimated the additional export potential thanks to the Istanbul agreement at more than five billion U.S. dollars – important foreign currency for war-torn Ukraine and the country's farmers. But the reality so far paints a different picture. "Freight costs vary widely, often within a single day. The market is nervous. Sometimes there are reports of Russian missile fire on the Odessa region, sometimes on the port of Mykolaiv, sometimes Russian fighters fly over the demilitarized sea corridor, which is intended for the safe passage of freighters," says Martyshev.

Juicy risk premiums

Gennedij Ivanov, managing director of the logistics company BPG Shipping, knows exactly what it means to transport goods under war conditions. For more than ten years, his company organized cargo shipments to Yemen. Now Ivanov has to convince shipowners to call at his hometown Odessa despite all the risks. "There are few shipowners who systematically work in potentially dangerous regions such as West Africa or Yemen and are willing to serve Ukraine as well, because they know that there are risk premiums. Ultimately, this means that the freight costs are much higher than in the neighboring, 'peaceful' countries of Romania or Bulgaria," Ivanov tells DW.

The sea freight specialist is confident: the longer the export corridor will function without incidents, the more shipowners will dare to travel to Ukraine. "When the grain agreement was signed, insurance companies expected premiums of four to five percent of the ships' market value for the seven-day period. Today, it's one to one and a half percent, which is still an average of 200.000 to 270.000 US dollars per week," says Ivanov.

"Russians displaced Ukrainian wheat"

The freight manager does the math: Hiring a ship to export grain from Ukraine costs about 10.000 US dollars per day more than one pays in neighboring Romania, for example. Elaborate security checks in Istanbul also mean that shipowners charge Ukrainian customers for an additional seven to nine days.

It was a condition of the Russians during the negotiations: Every ship is to be searched by Turkish military both on the way to Ukraine and on the way back to prevent any arms shipments by ship. "All this leads to the fact that a ton of cargo from the ports of Ukraine costs 25 to 35 US dollars more than from Romania," Ivanov points out.

The ship "Brave Commander" is to transport Ukrainian grain to Africa

These costs reduce the exporters' return on investment and lead to deductions in the purchase prices for Ukrainian farmers. This is an advantage for the most important rival on the grain markets: Russia – even though risk premiums for Russian ports have also risen somewhat since the outbreak of war.

"Russia expects a record wheat harvest of over 90 million tons this year. Under these circumstances, Russian wheat will dominate the market. The Russians can give discounts, they already ousted Ukrainian wheat from the main markets, such as Turkey or Egypt," says Pavlo Martyshev. The same applies to sunflower oil, he said. "Many factories have been at a standstill since the war began, and instead of sunflower oil, Ukraine is now exporting unprocessed sunflower seeds, which brings in much less foreign exchange".

Where to put millions of tons of grain?

Experts estimate that some 18 million tons of grain are still stuck in Ukrainian silos. Especially for farmers who grow corn, it will be tight. "In September/October, the new harvest will be here, and if exports are not drastically accelerated, there will be a shortage of storage capacity for around 10 million tons of corn," warns Martyshev, calling for international support, for example in the form of cheap loans, especially for smaller farms, to build temporary silos, and to help farmers with the next sowing season.

Heinz Strubenhoff was the World Bank's agricultural expert in Ukraine for many years. Today he works as an independent expert. According to him, the Istanbul grain agreement will only bring tangible results if international partners help Ukraine to shoulder the risk premiums of cargo insurance. "Russia has an interest in ensuring that uncertainty continues and insurance premiums remain high. The EU and the U.S. should have an interest in helping Ukraine with the costs of reinsuring the risks and thus making exports competitive again," says the agricultural expert.

If the economics of grain exports are in question, that could force many farmers in Ukraine to grow more canola or sunflowers, Strubenhoff fears. Nothing would be gained in the medium term for food security, which has been the international focus of efforts to reach a grain agreement for Ukraine, the expert warns.