Grain deal's future in doubt: is a recession looming? Anaysis by Caliber.Az

The year 2022 was marked by imported inflation, food shortages, and, in particular, an unprecedented rise in grain prices. The year was remembered for the intensification of global hunger and serious problems in developing countries. However, now there are no less complicated conflicts around food supplies from Ukraine to EU countries. Russia, for its part, warns of abandoning the "grain deal" in case of tougher Western sanctions and a complete ban on exports to Russia. In this tough situation, the efforts of the UN and Türkiye are aimed at stabilising the global grain market. Assessing the increased risks, Azerbaijan is making efforts to turn the country into a regional grain re-export hub in parallel with its efforts to increase cereal production.

According to the Food and Agriculture Organisation of the United Nations (FAO) data published in April, grain consumption in the world in the season 2022-2023 is predicted at 2.779 billion tons, which is 1 million tons less than it was expected in the last report. The biggest drop of 1.5 million tonnes is expected in coarse grains and, in particular, maize consumption, especially in the EU and a number of other Western countries with lower demand for animal feed. Even taking into account the decline in consumption, however, forecasts for cereal production are estimated at an even lower figure of around 2.777 billion tonnes. According to the UN profile report, the largest supply-demand mismatch this year will be in food wheat, and rice (about 516 million tonnes).

Overall, despite the fact that supply falls short of demand, prices for grains and oilseeds this season are expected to be slightly lower than last year, also due to the comparative cheapening of oil. The fact is that a fall in energy prices almost always reduces the demand for crops used to produce biofuels. This trend is very common in South America as well as South East Asia, where cereals and oilseeds are processed into bioethanol and biodiesel.

The unprecedented efforts of Turkish President Recep Tayyip Erdogan and UN Secretary-General António Guterres, which resulted in an agreement signed by representatives of the Russian Federation, Ukraine, and Türkiye in Istanbul on July 22, 2022, on the safe transportation of grain from Ukrainian ports to resolve the global food crisis, have played a very positive role in stabilising the grain market. Over the past 8 months, more than 26.3 million tonnes of agro-products have been exported from three Ukrainian ports, including 12.9 million tonnes of maize and 7.3 million tonnes of wheat, including those destined for countries most in need - Yemen, Somalia, Kenya, Ethiopia, Bangladesh, Sudan, etc.

Nevertheless, given the still difficult situation around the Russian-Ukrainian conflict and the expected adoption of the 11th package of anti-Russian sanctions by the EU and the US, there is no reason to talk about the complete stabilisation of the global grain market. The other day, Russian Foreign Ministry spokeswoman Maria Zakharova said that if the Group of Seven countries imposes a complete ban on exports to Russia, the backlash from Western restrictions will hit Europe first and foremost. Moscow's list of retaliatory measures includes ending the "grain deal" and restrictions on the supply of other critical products to the G7 states. Earlier, Russian presidential spokesman Dmitry Peskov said that circumstances were not yet in favour of extending the grain deal due to a lack of progress in the West's implementation of Russia's part of the deal.

Russia last extended the agreement on the supply of grain and other products from Ukraine in mid-March for two months, and this deadline expires on May 18. Moscow and Ankara are currently continuing talks on the possibility of further extending the deal, as Turkish Foreign Minister Mevlut Cavusoglu recalled the day before. "Russia extended the 'grain deal' by 60 days, at the same time they want their expectations to be met," the Turkish foreign minister said in an interview with Hürriyet newspaper, adding that discussions are currently underway regarding the intermediation of Turkish banks in grain and fertilizer payments from Russia.

It remains to be seen how Russian-Turkish negotiations on an extension of the deal will play out. At the same time, the grain market is also shaking on the Western side: Poland, Hungary, Bulgaria, Romania, and Slovakia have been involved in a recent trade conflict, requesting the European Commission to limit the amount of Ukrainian food entering the EU. Faced with an unprecedented increase in food supplies from Ukraine in the first quarter, in order to protect the domestic agricultural market from dumping, Warsaw and Budapest introduced a temporary ban on deliveries of Ukrainian grain as well as 18 products, including milk, eggs, vegetables, meat, beekeeping products, etc, in mid-April. However, these steps were appealed against to the European Commission (EC), and under pressure from the EC a compromise solution was found, according to which the transit of Ukrainian grain and other agricultural products through Poland and Hungary was resumed from April 21, but now under strict control in sealed wagons with GPS modules.

War and sanctions-induced disruption of traditional logistics for grain and other food and fertilizers has affected Russia, which is facing marketing difficulties. And the consequences of these problems are now being felt by neighbouring Kazakhstan, which is part of a common customs area with Russia under the Eurasian Economic Union (EAEU). "Recently, Kazakhstan's wheat market has been suffering losses because of illegal 'grey' imports of wheat, which caused $500 million worth of damage to Kazakhstan's state budget because of non-payment of transit tariff, VAT, and other payments. Imported wheat is re-exported to Central Asia and Afghanistan at a rate of 1.5-2 million tonnes per year without paying the duties due," Kazakhstani Vice-Minister of Agriculture Yerbol Taszhurekov said recently at a Central Communications Service briefing.

Today, together with the task of overcoming "grey" re-exports, Astana is keen to expand its access to the global market in order to increase its own grain exports. This issue is extremely urgent for Kazakhstan against the background of difficulties with transport outlets in the northwest direction observed since last year. For example, according to March 1, 2023 data, Kazakhstan has a wheat surplus of 10.4 million tonnes and intends to expand its wheat exports to foreign markets.

Azerbaijan, with its powerful port and rail infrastructure and extensive network of grain storage facilities, is ready to help Kazakhstan with grain logistics to the Middle East. "Azerbaijan is interested in ensuring the logistics of Kazakh grain to the Middle East markets, and today we need to gain a foothold in this segment, so that Kazakh entrepreneurs do not have to build other logistics, but can use ours, via Baku," Hasan Mammadov, Director of Consult Shipping Company of Azerbaijan, said during the forum "Transport Logistics in the Caspian Region" held on April 26-27. According to him, the western branch of the international transport corridor "North-South" is optimal for it. "Azerbaijan already ensures successful transit of Russian agricultural products to Iran via North-South: there is great demand for corn, wheat, and oats not only in Iran but also in Iraq, Qatar, Saudi Arabia, and Israel", Mammadov stressed.

Here it is pertinent to note the technical capabilities of Azerbaijan as a transit country, especially given the infrastructure potential created in recent years. More than 30 large grain storage facilities have been created in the country, including the Baku Grain Terminal (BGT), which became operational in April 2007. The founders were the Azerbaijani company Planeta L and the Kazakh joint stock company AK Bidai Terminal, who invested $6 million in the project in equal shares. BGT is equipped with modern equipment allowing temporary storage of up to 15,000 tons of grain, and its throughput capacity is 1,500 tons of grain a day. In turn, the largest grain terminal in the South Caucasus region, Astara Grain Terminal, operates in Astara, Azerbaijan. Its annual throughput capacity is 500,000 tons of grain and in the future, it's planned to increase this figure to one million tons per year.

Attracting grain suppliers from Russia and Kazakhstan will not only increase Azerbaijan's transit revenues but also improve the country's food security, as the multiplication of international traffic and storage of substantial volumes of grain in local terminals expands opportunities for procurement operations, reducing risks in case of force majeure.