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329269

Export problems plague Ukrainian farmers

One of the main factors for the current global food crisis is Russia's aggression against Ukraine.

Before the start of the war, Ukraine was steadily increasing its production and export of grain. In 2021, Ukraine produced 107 million tons of grain, of which it planned to export 70 million tons. Prior to the Russian invasion, Ukraine exported 43 million tons of grain and oilseed. Another 4 million tons were loaded onto ships, but not taken out. Thus, at the beginning of the war, 27 million tons of grain were “stuck” in Ukraine.

Ports Blocked

Ninety-eight percent of Ukrainian agricultural exports were done by sea and only 2% by rail and road.

As a result of Russian aggression, all Ukrainian ports on the Azov and Black Seas are blocked: the Ukrainian ports were mined by Ukrainians to prevent their capture by Russian troops. Currently, Russia is clearing mines from ports in the territories it occupies. For example, in Mariupol and Berdyansk, Ukrainian grain is being exported under the guise that it belongs to Russia.

At the same time, maritime trade routes in the northwestern Black Sea region were mined by the Russians to block maritime trade of Ukraine. Demining of ports and sea routes is possible only if there is a UN mandate, which is unlikely given the Russian veto in the UN, or a NATO mandate, which is also unlikely due to NATO's fear of being drawn into an open military conflict with Russia. Ukraine needs concrete guarantees that Russia will not land its troops in Odessa or Mykolaiv after Ukraine has demined its ports.

The carry-over stocks of grain for export by the beginning of the new marketing year in Ukraine are about 20 to 25 million tons, plus stocks for domestic consumption, which is about 5 million tons.

This year grain harvest is expected to be about 65 to 70 million tons. The total grain storage capacity, according to various estimates, is about 70 million tons. Thus, there will be no room to store at least 20 million tons of grain.

With the continuation of the blockade of ports, the only option for Ukrainian exports is by land (railway or road).

Export of grain by rail, road, and barges could amount to 3.5 million tons per month, or about 30 to 35 million tons per year, which is half the volume of exports by sea.

It should also be taken into account that the total transshipment capacity of all ports in Poland, the Baltic countries, Romania, and Bulgaria is only about 40 million tons of grain. Theoretically, it would be possible to transport grain to the ports on the North Sea, but in this case, logistics costs have skyrocketed, which makes this option economically unfeasible.

Currently, the export of Ukrainian grain by land transport is 1 to 1.5 million tons per month.

In Ukraine, there are currently about 9,500 wagons loaded with grain, but only 350 are crossing the borders per day, and the queue is constantly increasing. This means that the average idle time of grain cars on the railway is at least 30 days.

Trucking Issues

Most Ukrainian road grain trucks do not meet EU requirements. Queues at automobile checkpoints have reached one to two weeks. A grain truck can make a maximum of two round trips or take out 50 tons of grain from Ukraine in a month.

A shortage of drivers is brewing, since under the terms of the Schengen agreement, a driver cannot stay in the Schengen area for more than 90 days within a six month period. To solve this problem, some exporters have considered using foreign drivers after a truck crosses the border, which will lead to a further increase in the cost of transporting grain by trucks.

The freight rate for grain trucks reaches 4,000 to 5,000 euros per truck and depends not so much on mileage as on time, including queues at the border, which will only increase. For example, the cost of transporting grain from Mykolaiv to the port of Izmail on the Danube River by road is 160 euros per ton.

With such tariffs, it is economically reasonable to export by trucks a sunflower only.

Ukrainian exporters face a number of technical challenges when transporting grain by road. Since the beginning of the war, the cost of transshipment of Ukrainian grain in Europe has increased seven times. Therefore, foreign operators are in no hurry to develop the transportation infrastructure, having a very high profit on the existing infrastructure.

According to Kirill Mironov, Deputy CEO for Logistics of the Agrain company, EU regulations require a vehicle to undergo maintenance at least once every three years. Maintenance itself takes two to three weeks. Besides, there are not enough certified maintenance centers in Ukraine. The situation is complicated by this year's harvest in neighboring countries, which will lead to the provision of transport infrastructure in these countries, primarily to move grain of their own production.

But even if the theoretical volume of grain exports reaches 30 to 35 million tons considering the domestic consumption of 20 to 25 million tons of grain per year, the ending stocks of grain will amount to about 35 to 40 million tons.

Transforming the Railway

In Ukraine, at the state level, they have started talking about the transition of the entire railway network from the current (1,520 mm) to the European gauge (1,435 mm).

The former head of the state service for food safety and consumer protection, Vladislava Magaletska, expressed the ridiculous thought that Western neighbors are afraid of building the European railway gauge (1.435 mm) in Ukraine for fear that this will allow the Russians, in the event of the capture of Ukraine, to easily invade them.

Desperation breeds crazy ideas

In Ukraine and the EU, there is complete uncertainty about how long the war will last and how it will end. In the EU, this is expressed by a reluctance to invest in the development of European transport infrastructure: Is it feasible to invest in it if the war ends soon and Ukrainian ports are unblocked?

In Ukraine, the uncertainty is expressed in the absence of forward transactions, both between producers and traders, and between traders and consumers. And thus the producers of grain and oilseeds face the problem of repayment of loans.

This leads to two fundamental questions.

1) What to do with the available grain and the grain of the new crop?
2) What to do in the next marketing year?

Grain producers are desperately looking for solutions to their export problems. Provided the blockade of ports continues, 35 to 40 million tons of grain will not be exported, and producers and traders are trying to find new options for using grain in the domestic market. In most cases, these proposals are completely surreal.

For example, some producers are considering building silos abroad. This partially solves the problem of storage but does not solve the problem of grain export. If ports are unblocked, investors may lose money.

The commercial director of Baryshivska Grain Company (Kyiv region) Tair Musaev proposes to burn corn instead of coal at coal-fired power plants. This demonstrates the complete ignorance of grain producers and traders about the operation of coal-fired power plants (e.g. how coal is stored and prepared for combustion there).

The CEO and founder of Gals Agro (Kyiv and Chernihiv regions) proposes to harvest corn for silage and obtain biomethane from it, which then is pumped into main pipelines. This may be a one-time solution without taking into account the cost of acquiring the necessary equipment and connecting to pipelines. However, under conditions of uncertainty with the course of hostilities, such investments seem unlikely, and after the end of the war they may turn out to be unprofitable.

Proposals are being made to increase the export of grain processing products. One option is the export of flour. As Mykola Gorbachov, President of the Ukrainian Grain Association, points out, there is no single international standard for flour, and each trader in his country decides for himself which mixture of grains to use for flour production.

There are proposals to process oilseeds into oil and export it for further processing only into biodiesel, since the fuel tanks are contaminated with diesel fuel and other oil products imported to Ukraine. Although a longer-term solution would be to build our own factories, this option does not seem attractive for investment in the context of the ongoing war, when all Ukraine’s infrastructure is under the threat of destruction due to Russian rocket attacks.

Many producers are planning to significantly change their crop rotation, reducing, first of all, the area under corn and expanding the area under other crops like cash crops. At the same time, under conditions of complete uncertainty, difficulties arise with the choice of cultivated crops and the areas under them. In addition, this may require investment in new or additional implements, such as new drillers.

Finally, many growers are considering a significant reduction in production and will not sow next season if the war drags on. Only large companies with a “financial cushion” can afford this, though they still will have to cover fixed costs like land rent, salaries for key personnel, product storage costs, taxes, and so on. With this option, other enterprises face bankruptcy.

All these options mean a significant reduction in grain production in Ukraine next year, at least by half. If the world community is interested in overcoming the food crisis, it must take decisive measures to provide military assistance to Ukraine in order to restore its territorial integrity, unblock ports, and increase agricultural production. Otherwise, the world will face a worsening food crisis, further rising food prices and famine in poorer countries.

About the Author: Iurii Mykhaylov is an agricultural journalist in Ukraine.

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