MORE GRAIN, NO DEAL

Most experts believe that the grain deal concluded a year ago between Russia, Ukraine, Türkiye and the UN on the export of grain from Ukrainian ports via the Black Sea cannot make any newer decision change the situation on the world market any more. Despite the attempts of the UN, the EU and Türkiye to prolong the agreement, the Russian Ministry of Foreign Affairs sees no grounds for this. Meanwhile, risks in this area still remain quite high, despite the forecasts of the UN Food and Agriculture Organisation (FAO) about a record grain harvest in 2023 and lower prices. Given the ongoing global trends, Azerbaijan is intensifying steps towards grain import substitution after the recently completed winter harvesting season.     

Revenge for sanctions

The unprecedented efforts of Turkish President Recep Tayyip Erdogan and UN Secretary General António Guterres about a year ago played a very positive role in stabilising the grain market. On July 22, 2022 in Istanbul, representatives of Russia, Ukraine and Türkiye signed an agreement on the safe transport of grain from Ukrainian ports (Chernomorsk, Odessa and Yuzhny) to resolve the global food crisis. The second document signed at the same time provided for the removal of barriers to the export of Russian food and fertilisers.

In total, about 32 million tonnes of agricultural products, including various types of cereals and grains such as barley, wheat, corn, soybeans, wheat bran, sunflower meal, peas, sunflower seeds, etc., were exported through the sea corridor from three Ukrainian ports from on August 1, 2022-June 20, 2023. The main recipient of cargo transported under the grain deal was China, which received about 7.66 million tonnes of products, while Spain, Italy, Türkiye and a number of Southern European countries also benefited significantly from the transport network. The deal had a positive influence on Somalia, Kenya, Ethiopia, Sudan and other African countries, which collectively received 3.98 million tonnes of grain, or about 12% of the total share of shipments. A small portion of grain under the deal was sent to the Middle East region, to civil war-torn Yemen. Bangladesh, one of the world's poorest countries, was also among the beneficiaries of the deal.  

Despite all the positive aspects, the implementation of the grain deal faced serious problems throughout the year due to inconsistencies in the positions of signatories. The initiative was extended in November 2022 for 120 days, until March 2023, and then twice more for two months. However, by the end of spring 2023 it became clear that the Russian authorities did not have any intention to further extend the Istanbul agreement. For example, the spokeswoman of the Russian Ministry of Foreign Affairs, Maria Zakharova, stated that if the G7 countries impose a complete ban on exports to Russia, Moscow's response would include the termination of the grain deal and restrictions on the supply of other critical products to the G7 states. A similar position was expressed by the press secretary of the Russian president Dmitry Peskov. He said that the lack of progress in the West in terms of fulfilling the Russian part of the deal makes its extension meaningless. After the adoption of the 11th package of anti-Russian sanctions by the EU in June and the toughening of the US position on the Ukrainian conflict, there is no point in talking about the prospects for extending the grain deal, he added. Moreover, a number of experts believe Moscow's stance is tough because of the unprecedented grain harvest in Russia. Therefore, Russian producers do not want to give up favourable regional wheat markets to Ukrainian suppliers.

"Since June 26, the Joint Coordination Centre (JCC) in Istanbul has not issued permits for any new dry cargo ship to join the Black Sea grain initiative, despite the available 29 new applications. As the new ships will not be able to join the initiative, millions of tonnes of food will be stuck in ports until July 17, when the grain deal officially expires," said Farhan Haq, spokesman for the UN Secretary General.

No more deal?

At the end of June and in the beginning of July, a number of efforts were made to revive the grain deal or at least to renegotiate it in a new format. The EU summit held on June 29-30, 2023 in Brussels also called for the extension of the Black Sea Grain Initiative. In the beginning of July, the UN Deputy Secretary General for Humanitarian Affairs Martin Griffiths said about the readiness to resume negotiations with Moscow; Turkish President Recep Tayyip Erdogan expressed a similar position.

However, judging by the actions of market participants and assessments of specialised expert structures, the deal is no more interesting as a political tool. Apparently, any changes in the current situation will not affect the global grain market and the positions of signatories. This is due to the situation that has considerably changed since February last year. A year and a half ago, the geopolitical rift in Eurasia caused by the war in Ukraine and the tough sanctions confrontation between the West and Russia caused a sharp reduction in the supply of food and fertilisers from Ukraine, Russia and Belarus to the world market. This has caused an unprecedented grain deficit since the Second World War and created a serious threat of famine in the poorest countries.             

Today, threats of famine and other risks in the food market are noticeably lower. "Global grain production in 2023 reached a record high of 2.8 billion tonnes, which is 1.1% more than in 2022. Moreover, the wheat forecast was raised by 5.9 million tonnes in June almost entirely due to improved indicators of wheat harvest in most of the world. In particular, wheat harvest estimates for the EU, Canada, Kazakhstan and Türkiye have been raised," FAO said in its June survey. On a positive note, FAO rice production forecasts have been adjusted upwards to 523.7 million tonnes due to improved crop outlooks in Bangladesh and other countries and south of the equator. Overall, the UN's food price index stood at 122.3 points in June, down 1.4% from May and 23.4% below its peak in March 2022.

These facts indicate a noticeable decline in demand for cereals, which is not that dangerous than it was more than a year ago. Exports of American corn have significantly decreased due to high yields in Mexico and other countries of the region, with other types of feed grains also becoming cheaper. Wheat prices are also going down. Therefore, the market is not interested whether wheat supplies from Ukraine will continue or not. This trend only intensified after the Togliatti-Odessa ammonia pipeline was blown up in early June. At that time, international fertiliser operators and traders apparently stopped taking the Ukrainian market segment into account in their calculations. The link between the grain deal and global grain market conditions has also been levelled. Most grain traders prepared in advance for the negative outlook on the Istanbul agreement and simply switched to grain supplies from other regions.

Downsizing inevitable

Does all the above mean that the prosperity will last for many more years and Ukraine is no more a leading regional grain producer in the long term? Not at all. FAO medium and long-term forecasts have repeatedly stated the inevitable decline in cereal production, namely wheat, due to the reduction of arable lands, desertification process and lack of irrigation water, population growth, etc.

Therefore, the efforts of the European Commission (EC) to ensure that Ukrainian grain reaches world markets are understandable. In addition to Russia's position on the grain deal, there are other obstacles preventing the entry of Ukrainian foods into foreign markets. Grain markets in Western Europe have been turbulent since spring this year as well. The trade conflict now involves Poland, Hungary, Bulgaria, Romania, Bulgaria, Slovakia and Hungary. They asked the EC to limit the volume of Ukrainian food entering the EU. Faced with an unprecedented increase in food supplies from Ukraine in the first quarter and in order to protect the domestic agricultural market from dumping, Warsaw and Budapest imposed a temporary ban on Ukrainian grain supplies in mid-April. In addition, the banned list also includes milk, eggs, vegetables, meat, bee products, etc., i.e., a total of 18 items. But later the European Commission and the governments of these countries found a compromise. The transit of Ukrainian grain and other agricultural products through Poland and Hungary was resumed on April 21, but is conducted under strict control in sealed wagons with GPS modules. Meanwhile, the Hungarian and Polish authorities once again advocate extending the embargo on grain and oilseed supplies from Ukraine to the EU until September 15. They call on the European Commission to extend the embargo until the end of the year, arguing that this is to protect local producers from Ukrainian dumping.    

In response, more than 12 grain storage and export terminals are currently under construction along the Ukrainian coast of the Danube, in which it is planned to invest at least $120 million. The availability of grain terminals on the Danube will expand the possibility of supplying Ukrainian grain by river vessels directly to Central Europe, bypassing the complexities of railway transportation through Poland and Hungary.

Harvest year

We have yet to see how the situation with Ukrainian food products unravels by the end of this year. It is quite obvious that the comparative abundance of cereals in the current year may be followed by decreasing yields or reduction of sowing in the following years. This may again increase prices for bread and flour products. Thus, many countries that depend on imports of food wheat are at risk. Azerbaijan is one of such countries.

Harvesting of winter crops has almost been completed in the country: almost 2.165 million tonnes of mainly barley and wheat from the area of 658,300 hectares. Average yields of barley and wheat in June and the first ten days of July were 3.04 and 3.49 tonnes per hectare, respectively. These are quite good indicators, especially in comparison with previous years known for drought and lack of irrigation water. In spring 2023, the growth of grain crops was accompanied by abundant moisture in the fields, which had a very favourable impact on the yield. Unfortunately, Sheki-Zagatala, Mountainous Shirvan and Garabagh economic regions suffered from excessive amounts of precipitation. This continued during the grain ripening period also in May and June. As a result of heavy rains, mudslides, strong winds and hail, farms in 15 districts of the country were damaged to varying degrees.

The final results of the 2023 grain harvest will be known at the end of August, when the harvest of spring wheat, oats, barley, corn and legumes is over. In recent years, local farmers have failed to repeat the successes of 2018 and 2019, when the country harvested record grain crops. Drought and unfavourable weather conditions did not contribute to production growth in 2020-2021 either. The situation improved slightly in 2022, when about 2.85 million tonnes of cereals were harvested, including almost 1.732 million tonnes of wheat (about 60.8% of the total production).

Today, Azerbaijan produces an average of just under 3 million tonnes of cereals annually. It is enough to cover the demand for feed grain, but provides only 60% of the domestic consumption of baking wheat. Such a high dependence on imports carries significant risks. This actually happened in 2022, resulting in a sharp rise in the prices of flour, bread, pasta and other products.

Therefore, Azerbaijan is determined to expand the lands under specialised grain farms producing high level commercial wheat. It is planned to develop high-tech agro-parks in Garabagh and East-Zangezur economic regions with about 1 million hectares of farming lands, including 128,000 hectares of irrigated lands.

These steps are being implemented under President Ilham Aliyev's decree of July 19, 2022 on measures to increase the level of self-sufficiency in food wheat. They contribute to the growth of productivity in the grain sector and increase yields even under unfavourable climatic conditions. According to the decree, grain farms that use modern irrigation systems and have signed contracts with the State Reserves Agency and flour mills will receive subsidies for five years (₼100 for each tonne of wheat). Through subsidies, large and medium-sized specialised grain-growing farms and agro-parks will be stimulated to increase production of high-yielding durum varieties of baking wheat.

Thus, Azerbaijan will be able to protect itself from the emerging problems in world markets after reaching a safe level of self-sufficiency in grain products.