Trouble ahead: Russia ends Black Sea grain deal

Hey everyone, Peter Zion coming to you from Colorado. Today I want to talk about the wheat situation in Ukraine and Russia. Now for the last several weeks, UN staff and diplomatic personnel from Turkey and specific had been working to broker a deal that would allow Ukrainian wheat to leave Ukrainian ports under Ukrainian control and get to the wider world. There’s a lot of moving pieces here for one the Ukrainians of mind to their own ports, to inhibit the Russians ability to launch amphibious assaults, so they have to guide the vessels through. And then of course, the Russians are assaulting everything that moves and a lot of things that are not, so you have to get the Russians to agree to stop the results on the ports. Now, right now, the Ukrainians have about 18 million metric tons stored up in their silos at or adjacent to their ports, that’s a lot that needs to move, that is in excess of half of a normal harvest for the country. On Monday, August one, we got our first ship the rezone to dock to load up and to leave for Lebanon, it’s carrying 26,000 metric tons. So we need 700 more ships of this size, if we’re going to get that grain out. Unfortunately, the Ukrainian harvest starts in less than 45 days. So you’re talking about needing to get a dozen or so vessels in there every single day. So far, we’ve had one, I don’t have a lot of hope for this. And then the real problem, of course, is the next is the harvest two problems. Right now the Ukrainians have nowhere to put it, their silos are full from last year’s harvest, they weren’t able to export because the war started back in February. And second, even if the farmers were able to work their fields and not be molested by Russian troops. And remember, we’ve already had mass evacuations from eastern and southern Ukraine. The problem remains is that they can’t get fuel into the country. So you’re talking about needing to harvest industrial levels of wheat, without industrial equipment. And that’s just not possible. So likely end result here is that this is the last year that Ukraine participates in international grain markets, they simply don’t have the capacity to get stuff up at a scale. In fact, the only place that they might be able to ship stuff is by rail. And at most with significant upgrades that have not yet been done, they can probably only ship about 1/5 of their normal produce out that way. The rail lines are just not designed for that kind of bulk cargo. And a lot of them have to transit a little territory called Trans nice Dre, which is under Russian control. You remove the world’s fourth largest wheat exporter from the market, and you’re going to look at cascading problems, not just live food prices and malnutrition, but civil conflict and break down most notably in the Middle East. The last time we had a doubling of global wheat prices, we saw the Arab spring back in 2011, what we’re dealing with is an order of magnitude more complicated and deeper rooted. And to think that we’re only going to have a doubling of prices is ridiculously optimistic. Now in the United States, this isn’t necessarily a disaster, you double the price of wheat, you actually only increase the cost of a loaf of bread by 25 cents, we don’t subsidize food processing, like say Egypt does. So here, it’s a little uncomfortable, it’ll probably be noticed, but it’s not going to be a deal killer. Other parts of the world, not so much.
The Russians are throwing a bit of a fit about the great deal they have with the Ukrainians. Now, Ukraine, until very recently was one of the world’s five biggest agricultural exporters for wheat and have number four in core and it’s number one in sunflower, you know, all important things that help prevent a lot of countries from starving to death. Well, the problem is that most of the stuff that comes out of Ukraine is shipped by water, it’s far easier to ship things by water than it is by land in terms of Braille versus water is about a three to one cost difference. And if you create, it’s perfectly set up for that, because they’ve got the NEPA river that cuts right south to north through the middle of the country. And so everything just gets out of the park goes out, eventually hits to the series cities of KEARSON. And Odessa, are put on the big altars that then take it to the Black Sea, the Turkish straits and the rest of the world. What has happened, however, is with the Russians, first capturing Pearson, and then putting Odessa under assault, this is all been disrupted. So the only way to move things out of Ukraine at present is by rail. And not only that Ukraine not have a well developed rail system, it doesn’t use the same gauge as the European ports. So it’s been very, very difficult to get it out really less than about one out of six bushels that they use to ship they can ship now. Now, the Turks in league with the United Nations have convinced the Russians to sign on to a Green Deal. And this Green Deal allows ships to come into Odessa get searched by the right Ken is on the way and to make sure they’re not carrying weapons, and then load up with grain and they get searched on the way out to make sure that they’re not carrying anything that the Russians don’t want to get out. This has increased the volume to about 20 to 25% of the volume that the Ukrainians could do before the war. So still not great. Now, if you’ve been following the war, you know that throughout the winter, the Russians have been bombing the power grid with drones and missiles to try to kill as many Ukrainians as possible. They’ve been doing this in the winter thinking that if you can freeze the country to death, many 10s of 1000s, if not hundreds of 1000s of people be injured and killed. And that might weaken the war effort. Once we get to summer, that’s going to change. So what the Russians are facing here is they the Green Deal is normally renegotiated every 120 days, are now a CST that they will only want to 60 day renewal. Well, if you fast forward from late March 60 days, or getting into the beginning of summer, in the beginning of summer, the Russians will have a vested interest in destroying the power grid because no one’s going to freeze to death. So they’re going to go after the agricultural system, everything from fertilizer on the front end to the silos and the rail stations on the back end to try to kill as many people as possible that way. So last year, was probably the last year that Ukraine will be a significant agricultural exporter at Paul. And we should not expect to see the Green Deal renewed come late May. That’s just a situation you were at. And you have to throw in the problems with natural gas and nitrogen processing in the in Europe hitting the fertilizer market. The problem is getting potash out of Belarus hitting the fertilizer market, the crops getting phosphate out of China hitting the fertilizer market. Later this gear, it’s going to be really rough for a lot of places.
I want to use today as an opportunity to talk about some of the agricultural things that are going on in the Ukrainian space. Specifically, we now have a coalition of five EU countries that have decided they’re not going to accept any shipments any longer from Ukraine, they’ll still allow trans shipments. So it’s not like the stuff has completely gone now. But they’re not going to take the deliveries themselves. You’ve got five countries, Poland, Hungary, Slovakia, Bulgaria, and Romania, all of who are relatively significant agricultural producers for a lot of the same products that come out of Ukraine. And what’s been happening is, with the Ukrainians have lost the ability to do their normal export systems. Normally, they would ship everything out by water down the Nieper, get it packaged at a place like Nikolaev or Odessa and then shipped out to the wider world. Or they would process it and crush it in the case of sunflower at home, and then ship out the the intermediate product, they can’t do any of that right now, power grid is not stable enough to do the crashing. And most of the crashing is imports, several of which are under Russian control. And the Russians have the ability because they have naval supremacy in the area to prevent any sort of Volker from coming or going without their Express say. So. Now there has been a deal in place that allows the Ukrainians to export some what basically the Russians insist on inspecting the bulk or on the way in and the way out to make sure it’s not being used to smuggle. And that deal is basically falling apart now. So it’s been going less and less and less over the winter. And now it’s basically defunct, and the Russians are indicating that they really have no intention of reopening it at all. Now, this used to be 80%, almost 90% of Ukraine’s exports, you can rail stuff out. But now three problems. Number one, there’s a different rail gauge between the European Union and the former Soviet world. So that’s a problem. You there are only so many carriages that can adjust. Number two, all of the countries that are on the edge, you know, Poland, Romania, and the rest. They’re all grain exporters themselves. So when the Ukrainian stuff was coming in, it was getting dumped on the local market, local farmers were getting quite aggroed. And now they can’t do that. So you can still export it through these countries to other places. But then you need twice as many rail cars that are capable of that jump, or you need a facility at the border that can shift the grain from one car to another. And those just don’t exist at scale. And now you need twice as many to get the same amount of stuff out. So all told, with these two problems in place, you’re looking at Ukrainian grain exports dropping by roughly 80 to 92%. And there’s really no way around that. The third problem is that processing stage. The Ukrainians while always been a significant exporter of the raw stuff also did a lot of crashing specifically for their sunflowers. Well without crashing now I’m accessible. They need to find another facility. There are facilities in all five of these countries, but they process local stuff. So once you process an agricultural commodity into things like oil, it takes up a lot less space, it’s higher value to bulk Well, not only are the Ukrainians not able to do that now. So they get this higher bulk lower value product, they have to send it farther. And it’s just takes too much effort and too much cost and there’s not enough infrastructure to support it. They’ve been trying to build up the rail system, they’ve been trying to bring in more rail cars, carriages, but it just hasn’t been enough to move the needle. And so even without the Russians deliberately attacking the agricultural infrastructure, which they are doing, you’re still looking at that 80 to 90% reduction in the ability of Ukraine to participate in the international market. The biggest losers, aside from the Ukrainians, of course, are the Egyptians who source the majority of their imported wheat from Ukraine specifically, but there’s a large number of countries in Africa and in South Asia, that source ultimately Ukrainian and to a lesser degree, Russian wheat, and we’re going to see all of them get hit to a significant degree. The question will be, if we get to a point where the Russians start actually targeting shipments themselves, we’re not there yet, it’s probably just around the corner. The only way that this is going to change is this, the Ukrainians get access to the water again. And that means if this counter offensive that they’ve just launched is successful, it would have to include, at a minimum the liberation of the entirety of the Crimean peninsula, because most of the grain goes down the Nieper river to Odessa. And as long as any part of that route is within range of Russian weaponry. It’s just a no go. So you’re talking about them having the Ukrainians would need to liberate the entirety of southern Ukraine and the entirety of the Crimean peninsula. And that is a very, very tall order probably won’t happen this year. Which means that any of the agriculturalists and farmers in Ukraine who gets screwed this year, because of a lack of export options, won’t have the income that’s necessary to afford to plant next year. And assuming a runaway Ukrainian victory. It still means that Ukraine is not going to be a significant agricultural player in the world for several years. And then of course, if the counter offensive fails a lot longer than that.