Global grain traders leave russia. How is this going to affect the Ukrainian agricultural market?
Four out of five global commodity traders are hastily winding down their operations in russia
In less than a month, global grain trading companies achieved what they had been unable to do for a year since the start of russia's full-scale invasion of Ukraine – they decided to withdraw from the russian market.
Cargill, the largest private American company, will stop direct purchases of russian agricultural products in the new marketing season, which begins on 1 July 2023, as the local agriculture ministry has already announced.
Another giant, Viterra, according to Bloomberg, will publicly announce the curtailment of its operations in russia in the coming days. Viterra Limited has already informed the russia's Ministry of Agriculture that starting from 1 July 2023, it does not intend to continue exporting grain and is considering transferring its business in russia to new owners.
The international agro-industrial company Archer Daniels Midland (ADM) is also considering the format of leaving the rf market.
Last year, these companies accounted for more than a third of all grain exports from russia.
Mind investigated the reasons for this unanimity of market players within the formally non-sanctioned agricultural sector and the impact of the largest grain traders' departure on the situation in the Black Sea region and Ukraine in particular.
To begin with, why have global grain traders been operating in russia? Agricultural products, along with fertilisers and pharmaceuticals, are exempt from sanctions for humanitarian reasons.
However, even this area is influenced by a number of political factors. Firstly, self-sanctions, when buyers avoid dealing with russian goods on their own. And secondly, the indirect consequences of the aggressor country status, such as freight rates that have increased significantly or the cost of insurance. Trade is also hampered by restrictions on russian banks and state-owned companies.
Nevertheless, Viterra's revenue in 2022 was RUB 80.7 billion (15% more than a year earlier). The company ranks 4th in the top ten grain exporters.
Cargill is the 6th largest player in terms of russian grain exports, generating 4% of the grain trade.
What does "winding down operations in russia" mean for the grain trading market? Direct purchases of grain within the russian market are being stopped. However, companies will be able to (and most likely will) buy such cargoes from other companies.
TNCs usually do not invest directly in agricultural production, but control the industry through investments in infrastructure and supply chains.
Today, companies are divesting themselves of their assets in russia. Viterra is selling 50% stake in the Black Sea Taman terminal with a capacity of 5 million tonnes of grain per year. Cargill owns a 25% stake in the 6 million tonne per annum KSK terminal in Novorossiysk.
Fertiliser producer Uralchem and VTB have also expressed interest in buying Cargill and Viterra's assets.
Archer-Daniels-Midland Co. owns a 50% stake in a joint venture with russian company Aston that processes corn for sweeteners and starches used in the food and beverage industry.
Why did they decide to exit the russian market at this particular time? It is not the decision itself that is symptomatic, but the form in which it was presented – as publicly as possible – and the companies that are leaving, who are only of American nationality.
There is, certainly, no question of suddenly realised ethical considerations: the decision to withdraw from russia was forced, hasty and without alternative.
In its statement, Cargill mentions the complicated operating conditions on the russian market, which can be interpreted as complaints about the quota principle of exports and restrictions on financial transactions with russia.
However, the reality is more mundane and has two complementary components.
First. The kremlin has been consistently nationalising russian grain exports, seeking, on the one hand, to control the most profitable component of agricultural production and, on the other, to exclude unfriendly influence on the strategic industry. In such a setting, it will be impossible for any other companies to operate, except those controlled by the russian government. The state controls the market through a system of quotas and duties, having the ability to artificially limit a particular player.
Second. The situation of American companies in russia is becoming threatened by the next round of escalation in relations between the two countries, and their employees may be perceived as hostages.
After the arrest of The Wall Street Journal journalist Evan Gershkovich in russia last week on espionage charges, US Secretary of State Anthony Blinken said that all American citizens in russia should leave immediately.
According to an unconfirmed version, representatives of the US Department of Agriculture (USDA), a government agency whose advice is dangerous to ignore, contacted global grain traders' head offices with relevant recommendations
Read also: Leroy Merlin is finally leaving russia. Why did it happen only now and what made the chain give up
How did the russian authorities react? Expectedly: "Let them go – we are better off".
The number of apparently carbon-copy front-page stories of the russian media, with the main message that "russia will make money on the departure of multinationals", most clearly demonstrates the sharp reaction to the global grain traders' departure from the market.
There are five global traders in total, what is the position of the remaining ones? Bunge Corporation closed the sale of its russian assets in early February, selling its oilseed processing facilities to Exoil Group.
Louis Dreyfus, which reportedly shut down its operations in russia in early March 2022, nevertheless remains a participant in the local grain market. The business is owned by Marguerite Louis Dreyfus, a native of Leningrad and a Swiss citizen, who several years ago reached an agreement to sell 45% of the company to the sovereign wealth fund ADQ of Abu Dhabi.
Updated:
After the article was published, it was reported that Louis Dreyfus was also winding down its operations in russia. The company will stop exporting russian grain from 1 July. A letter signed by Paulo Gladchuk, CEO of Louis Dreyfus East LLC, was sent to the russian Ministry of Agriculture. Louis Dreyfus explains its decision by "growing difficulties in grain exports."
The company also said that it is exploring options for transferring its existing russian business in LDC's grain assets to new owners, including its Azov Sea terminal.
Louis Dreyfus has become the fourth global company to announce its decision to stop exporting grain from the rf in the last month.
What does the global players' exodus mean for the russian grain market? In the short term, nothing disastrous. The rf remains the largest agricultural product supplier from the Black Sea region. And there are plenty of countries in the world that don't care about the origin of grain, provided it is cheap. To become fully self-sufficient in the grain export segment, russia lacks only its own fleet that is now being actively built.
Nevertheless, in the long term, "putin's" agricultural market inevitably risks degradation, as global traders have created a competitive environment and thus infused additional money into the industry, on which it had been developing.
Also, global traders operating all over the world could sell russian grain without any problems. Whereas working with a russian company is an additional risk for counterparties. They will try to avoid such deals, which threatens the russian market with overstocking, falling domestic prices and, in the long run, lower harvests.
Read also: Purse or life: Many global companies still operate in russia. How do their Ukrainian subsidiaries feel, and who will react faster to the pressure?
What global implications could the shutdown of grain traders in russia bring? The uncertainty of grain exports from the Black Sea region will increase, as russian companies are unpredictable and are guided not by business logic but by the kremlin's political whims.
On 29 March, following the news of Viterra's dismissal, the contract for May wheat delivery rose by more than 1.2% to $259.55 per tonne on the Chicago Board of Trade.
What does this mean for the Ukrainian market? Competition for Ukrainian grain may increase in the face of the russian market ban, pushing prices up. The operations of grain TNCs in Ukraine will most likely intensify.
The corporations will use lobbyists to seek to restore the status quo on the russian market, including through military pressure on russia.
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