Analysis: Black Sea conflict may alter global trade patterns for grains, veg oil

Pressure on global agriculture markets is growing as the Russia-Ukraine conflict enters its third week as prolonged hostilities could force grain and oilseed buyers that rely on the two major Black Sea producers to look elsewhere for their supplies.

The disruption of supplies from the region have given rise to concerns over food inflation, especially while global cereal and oilseed prices are at all-time highs.

The two countries account for around 26% of global wheat exports. Russia has exported 26 million mt of wheat to date in marketing year 2021-22 (July-June), accounting for 80% of the US Department of Agriculture's estimate for the year, and Ukraine 18 million mt, accounting for 90% of the USDA's estimate.

The USDA also expects Ukraine to supply 13% of global corn outflows for the year. It has exported nearly 18 million mt of corn so far in MY 2021-22, reaching 65% of the USDA's full-year estimates.

The countries also represent about 80% of the world's exports of sunflower oil. The prices of other vegetable oils have also been affected by the conflict-related supply shortage for sunflower oil as they are competing markets.

Wheat markets in turmoil

Russia is the world's largest wheat exporter while Ukraine is among the top five. The prices of both crops are at record highs amid the pause in outflow.

S&P Global Commodity Insights estimates Russia's wheat exports at 36.5 million mt and output at 77.6 million mt for MY 2021-22. Ukraine is expected to ship 22.5 million mt wheat and produce 31.2 million mt.

The export prices for both Russia and Ukraine-origin wheat have risen 45% since the invasion began Feb. 24. S&P Global assessed Russian 12.5% wheat FOB price at $440/mt and 11.5% Ukrainian wheat at $436/mt March 10, both up $10 day on day.

The export prices of Australian and Canadian wheat rose 27% and 15%, respectively, over the same period due to concerns over supply tightness.

The top Black Sea wheat buying countries -- Egypt, Turkey, and Indonesia among others -- are the worst hit by the trade disruptions and higher prices.

Egypt has banned the exports of wheat and flour for three months from March 12 to shore up supply, while Iran has set aside $100 million to create wheat reserves.

"The Middle East and Northern African regions usually purchase wheat from the Black Sea, but now with trade flow stagnant they are looking at alternative sources for wheat," an official with multinational grains trading firm said.

The demand for Black Sea wheat is likely to shift to European nations, like Germany, France, Romania, and Bulgaria, in the near term, sources said.

Traders are also looking for Australian crop, however, higher prices may keep importers away. India, sitting on huge stockpiles, has emerged as a major exporter of wheat as it is able to offer wheat at relatively lower prices.

Ukraine corn prospects hit

Ukraine is the fourth-largest exporter of corn and the invasion has dented corn exports in MY 2021-22 and raised concerns over the new crop planting due in April.

The USDA has cut Ukraine's corn export estimate by 6 million mt to 27.5 million mt due to the invasion.

Buyers are likely to turn to US corn amid the export disruptions, market sources said. Major destinations for Ukraine corn include China and the EU.

The USDA has also raised the US corn export estimate for MY 2021-22 by 1.9 million mt March 9.

The invasion is also seen hurting Ukrainian corn production in MY 2022-23.

According to S&P Global's estimates, Ukraine's corn production in MY 2022-23 is seen at 27.5 million mt, down 38% from MY 2021-22.

The US is currently the available option in the global corn market as South America's corn harvest is a few months away. However, in the longer term, the absence or low supplies of Ukrainian corn could favor South American corn.

Conflict threatens sunflower oil supply

About 1.2 million mt/month of sunflower oil is scheduled to be exported out of the Black Sea in March and April, Thomas Mielke, head of Hamburg-based Oil World, said at a conference March 9.

The region typically ships 10.5 million mt/year of sunflower oil.

"At the moment, the vegetable oil export shortfall at the Black Sea represents 13% to 14% of world exports and cannot be replaced by other origins without a sizable reduction in biodiesel mandates," Mielke said.

While sunflower oil typically accounts for only about 9% of global vegetable oil consumption, it is an important source of vegetable oil for the EU as well as many Middle East and North African countries including Turkey, Iran, and Egypt.

Top vegetable oil buyer India has been ramping up sunflower oil imports in the last three months as sunflower oil prices intermittently dipped below rival vegetable oils soy and palm.

"A month ago, we expected Black Sea sunflower oil exports to grow well over 2 million mt to 13.5 million in MY 2021-22. Now the question is how much will be lost due to the invasion," leading analyst James Fry chairman of agribusiness consultancy LMC International said.

"This is a perfect storm. Stocks and export supplies of oils are down. The cupboard is bare; therefore, there is no alternative to letting high prices do the job of rationing demand to balance the market."

Related Interactive: Ukraine-Russia conflict shakes agriculture supply chains, raises food security concerns