Black Sea Becomes a War Zone, Global Wheat Supply in Danger Zone
The Russia-Ukraine conflict has once again shaken global food markets. This time the trigger comes from the logistics chain. Attacks on ports and transport vessels in the Sea of Azov and Black Sea region have halted most wheat exports from the two countries.
This condition reduces the supply of cheap wheat to international markets and pushes global prices steadily higher.
According to Reuters, more than 97% of Russian and Ukrainian wheat export capacity in the Black Sea region is now unable to operate. In the previous export season, the two countries on average shipped around 7.2 million metric tonnes of wheat each month through terminals in the Black Sea and Sea of Azov. At present there are no longer any shipments from Ukraine’s main Black Sea terminals.
In Russia, the only terminal still operating is a small facility in Tuapse with a capacity of around 160,000 tonnes per month.
The disruption is directly affecting price formation in global markets. World wheat prices have risen about 6.5% this month and are now around 30% higher compared with the same period last year. The increase comes as the market prices in reduced supply from a region that has long been one of the world’s main sources of wheat.
Pressure is coming from the distribution side. In recent weeks, Russia and Ukraine have escalated attacks on each other’s port infrastructure. Reuters reports that a number of vessels loading or preparing to load wheat at Russian ports have also become targets of drone strikes.
As a result, several major export terminals in Novorossiysk, such as NZT and NKHP, have suspended operations following Ukrainian attacks.
The KSK terminal, Russia’s largest wheat export facility, has also suspended grain intake and export activity. Wheat terminal operations in Taman have also come to a halt.
On the Ukrainian side, port activity in the Odesa area has effectively stopped since late July. Ukrainian Agriculture Minister Taras Vysotskyi said that as of mid-August no new vessels had entered the port. Ukraine’s wheat exports currently depend on rail routes to Eastern Europe and ports on the Danube River.
Each accounts for around 45% of shipments, while the remaining 10% uses overland routes. The Ukrainian government estimates export capacity will only reach about half of normal potential if the port blockade continues.
The decline in exports is also beginning to show in Russian trade data. Analysts at Rusagrotrans, part of Demetra Holding, estimate Russian wheat exports in August will reach only 1.8 million tonnes. That volume would be the lowest for August since 2010.
Wheat importers now face increasingly limited options. Countries in the Middle East, Africa and Asia are expected to increase purchases from Australia and the United States.
Those supply routes are available, but logistics costs and wheat prices are higher than supplies from the Black Sea. Russia still has the option of diverting exports through ports in the Baltic Sea, Caspian Sea and the Far East, but longer routes increase distribution costs and slow deliveries.
This development poses a new risk to global food inflation. Wheat stockpiles in a number of countries are still sufficient to withstand pressure in the short term. However, as long as port activity in the Black Sea has not recovered, the market will continue to face supply uncertainty.
This situation opens the possibility that wheat prices will remain at elevated levels for some time to come and raises food import costs for many countries, including those that depend on wheat as a key raw material for the food industry.