As the war in Ukraine closes in on its fourth year, it is amazing to see just how desensitized to it we have become.

In the beginning of the invasion, I lost count of the number of times I was asked if the world was going to run out of wheat or corn. Now we talk about record yields and unimpeded exports out of both countries as if there is nothing going on, which unfortunately, couldn’t be further from the truth.

This week as the potential for peace reemerges, I wanted to look at what is currently happening in the Black Sea, how it stacks up against the narrative, and what I believe it means for grain movement in the months ahead.

Energy and Rail

When it comes to moving grain into the global pipeline there are several components that need to operate well to do so. Of those, electricity is one of the most important as it allows farmers and elevators to collect the harvest, get it into condition and ready to move into the supply chain. Directly behind that is logistical capacity, with many countries relying heavily upon rail infrastructure to get their grain from where it is produced to where it is needed.

Unfortunately for farmers and grain end users in Ukraine, attacks by Russia have become focused on both. Russia’s attacks on energy infrastructure are nothing new, though as the country struggles to cobble together its grid, they are carrying more impact. According to a report from a Ukrainian think tank, nearly 70% of Ukraine’s energy infrastructure has been damaged and will struggle to be repaired while the war wages on.  Between the damage already seen and the continuation of attacks, blackouts have become the norm and are expected to continue throughout the winter.

Rail lines are being targeted as well, with attacks by Russia on Ukraine’s railroad infrastructure having increased threefold since July, wreaking havoc on logistics. According to The Guardian, Ukraine moves over 63% of the country’s freight using railroads. Reports indicate many of the attacks on the rail lines are also done with an intent to cause fear, as many times Russia uses drones with the ability to target individual locomotives, taking out both the driver and equipment. In late October, Russia’s attacks on Ukraine’s rail infrastructure were so intense that ports in the country announced they would not be accepting trains.

For farmers and merchandisers across Ukraine, the lack of electricity is exacerbating an already problematic harvest. Early rains and high moisture corn in fields would already   be causing significant headaches with the lack of drying or dumping capabilities as energy disruptions grow causing even further issues. Traders across Ukraine are worried over the quality of the crop, especially as harvest looks like it will only drag on further with above normal temperatures creating additional quality concerns.

Meanwhile in Russia, we are seeing similar issues when it comes to grain movement and the targeting of rail and energy infrastructure. While Ukraine has made hitting Russia’s oil refineries and export terminals more of their focus, they are also targeting rail lines and bridges. These strikes have destroyed several rail bridges and disrupted the flow of grain from the interior to exterior ports. In addition to issues with infrastructure, Ukraine’s strikes on refineries have created fuel shortages after taking a significant portion of Russia’s production capacity offline.

What Are the Impacts?

While headlines talk of increased export potential, with some even going so far as to claim Ukraine’s ability to move grain remains relatively unimpeded, it takes some digging to see if there are signs these attacks are causing issues. After looking at shipment figures though, it is easy to see that yes, grain shipments are being disrupted.

Ukraine’s wheat shipments are down nearly 2 million metric tons or around 70 million bushels from a year ago. This is interesting to me for a couple of reasons, one being that many are talking about exports being up by as much as 2 mmt year over year, with the USDA currently expecting exports to remain flat. Two, the bulk of major exports out of any wheat exporting country tend to need to happen on the front end, making this year’s slow start to the Ukraine program potentially that much more problematic as infrastructure problems are likely to continue.

When it comes to corn in Ukraine, the gap between this year and last is even worse. According to an update this week from Ukraine’s Ministry of Economy, Environment and Agriculture, Ukraine’s farmers have harvested almost 21 mmt of corn, compared to nearly 24 mmt harvested a year ago at this time. The group blames the late start to corn harvest for the delay.

Overall, corn exports out of Ukraine to start the season are down nearly 4 mmt or 157 million bushels from last year. Freight costs remain elevated, movement is slow and quality concerns are on the rise making it difficult for me to see how they beat last year. The USDA and many private estimates, however, have them outpacing a year ago by upwards of 5 mmt or 197 million bushels.

In Russia, wheat shipments have been notoriously slow, though the pace did pick up substantially in October. When looking at shipments from June through October of this year, Russia is over 5 mmt or 184 million bushels behind last year’s pace. Like the outlook in Ukraine, the USDA and many private analysts are expecting Russia to outpace a year ago by 1-2 mmt.

Peace Talk Breakthrough?

Earlier this week we learned of a plan put together by members of the Trump administration with reported input from Russia. The plan has 28 points, many of which we have heard previously. In the agreement Ukraine will give up significant portions of their Donbas region, give up their desire to join NATO, cut the size of their army as well as a handful of other things in exchange for a ceasefire and security guarantees from the EU and the US. For Russia, they would be required to put it into law that they would not attack Ukraine or Europe and would be reintegrated back into the world economy.

Leaders across Europe were reportedly blindsided by the plan, with some members of Ukraine’s leadership shocked at what was presented. Zelensky spoke out today saying he now must choose between his country’s dignity and the possibility of losing a powerful partner. President Trump has given Ukraine until Wednesday to decide, making it sound as though there is little room for negotiation. There are reports indicating that the US is prepared to cut off Ukraine’s intelligence and possibly more if they do not agree, though nothing has been substantiated.

With Ukraine struggling from an energy and infrastructure standpoint, they may find themselves without much of a choice. European leaders are scrambling at the time of this writing, working along the sidelines of the G20 summit in the hopes peace can be found without what many are calling forced capitulation by Ukraine.

Of course, how this situation plays out will have major implications on grain movement and production in future. If we see Ukraine agree to peace, things will deescalate and the attention can focus on rebuilding. While grain movement will remain slow as infrastructure is rebuilt in both countries, optimism is likely to return and risk premiums currently being charged on movement will be reduced.

If they do not agree, it is very likely the situation will both escalate and worsen in a major way. This makes the conversations and developments that take place this weekend and early next week that much more important, as it is likely to be the last major effort put forth by the administration to bring this situation to an end.

From a price standpoint, a resolution has been seen as bearish initially. However, with analysts and the USDA already forecasting unencumbered movement out of the region even with the war, it is difficult to see how they bump their export forecasts that much higher from here. A lack of resolution and escalation would cause further disruptions to movement, requiring an increase in risk premium paid across the region and a recognition that current export projections for both countries are too lofty.

While it has grown easy to ignore the situation in the Black Sea over the last few years, especially with record grain production elsewhere, it may soon demand our attention. As always, don’t hesitate to reach out with any questions. Have a great weekend!