Russia’s announced blockade of Ukrainian grain exports has repercussions as far away as Germany. In the short term, product prices could rise by up to five percent. In the long term, they are likely to remain high.
After the Russian fleet was attacked by drones in the Black Sea, Russia withdrew from the grain agreement that both warring parties had only signed in July with the help of the UN and Turkey. Although it would have expired in November anyway, it is now also clear that Ukrainian grain exports are being permanently blocked by the Russians.
This has an impact on the entire world market. As recently as 2020, Ukraine was the fifth largest wheat exporter in the world. Ukraine is also one of the top six exporting countries in the world for other types of grain, such as barley. Many countries are dependent on these supplies. The stalled deliveries caused by the outbreak of war in February had triggered price and hunger crises, particularly in many African countries.
With the lack of exports from Ukraine, global prices rose. From mid-February to mid-May, the share price for wheat rose by around 60 percent. Thanks in part to the Grain Agreement, with which Russia guaranteed the safe passage of transport ships through the Black Sea, it almost fell to the pre-war level in the meantime.
From there it went up again strongly. On the Chicago Stock Exchange, the bundle of wheat jumped five percent in price over the weekend. How far it goes is uncertain. Dealers had recently estimated the price a little higher because the agreement would have expired in mid-November and an extension was not yet certain. David Laborde of the International Food Policy Research Institute in Washington told Bloomberg that he expects the decision to increase prices by between five and ten percent.
For countries that depend on Ukrainian supplies, the new blockade is a disaster. Not only do they lack the food they need, they now have to get it from other sources at higher prices. At the weekend, for example, a ship with 40,000 tons of grain bound for Ethiopia was unable to sail. The delivery would have been part of the UN World Food Program. In East Africa, especially in Sudan, Somalia, Ethiopia and Kenya, there has been a hunger crisis for almost a year. Aid organizations such as Oxfam estimate that up to 200,000 people could starve to death here in the next three months without international aid.
A new blockade of grain deliveries would also affect Germany, albeit far less dramatically than in East Africa. Higher world market prices for grain would also increase the prices of products in our supermarkets. Even if German manufacturers are not dependent on Ukrainian grain, they have to pay for the falling supply while demand remains the same. The figures from the Federal Statistical Office from the year to date indicate that producer prices for agricultural products in Germany are largely in line with world market prices.
Correspondingly, grain products are likely to become five to ten percent more expensive to manufacture in the future, by which the world market prices for wheat, barley and similar grains are rising. How much of it the producers pass on to consumers is uncertain. While producer prices for flour, for example, have risen by around 40 percent since September 2021, consumer prices have only risen by 18.5 percent. However, that was still well above the general inflation rate of 10.4 percent. If the ratio stays the same, grain-based food prices would increase another 2.5 to 5.0 percent in the coming months.
The problem is that due to the grain blockades, it cannot be assumed that these prices will fall again in the coming year. This is due to two effects: First, Russia is not only blocking the export of grain, but is no longer supplying the world, and especially the Ukraine, with sufficient quantities of fertilizers. This will ensure that field yields will fall in the coming years, i.e. less grain will be produced.
Another complicating fact for Ukraine is that without the certainty of being able to sell grain abroad, Ukrainian farmers currently have no incentive to grow the crops in the first place. Large quantities of grain that have already been harvested already have to be destroyed because the storage facilities are insufficient. Ukrainian farmers cannot afford to plant grain for the coming year, which then only ends up in the dustbin.
These two developments are therefore likely to tighten the supply of grain on the world market at least once in 2023. This in turn keeps prices up – also in Germany.
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