Grain update: What has changed after a week of the EU blockade of Ukrainian agricultural products
The unconditional support of the European Commission has actually been overestimated. The regulator seeks to take into account primarily the market interests of EU members
UPDATED: On 28 April, in the evening, the European Commission reached an agreement with five Central and Eastern European countries to restrict imports of grain and other food products from Ukraine. Intensive negotiations lasted for over a week. They resulted in a decision that Poland, Hungary, Slovakia and Bulgaria will lift national restrictions on imports of Ukrainian agricultural products that they unilaterally imposed last week. The European Commission will instead ban imports of maize, rapeseed and sunflower seeds to 5 Member States – Poland, Slovakia, Hungary, Romania and Bulgaria. In its decision, the EC refers to Article 4(9) of Regulation 2022/870 on zeroing duties for Ukraine, according to which the Commission may apply emergency measures in super-crisis cases.
In doing so, transit through these countries, imports to other EU member states and third countries will not be restricted. The EU will also provide about €100 million to support the domestic agriculture of these countries.
The restrictions will be in place until early June, but may be extended until the end of the calendar year. They may also be extended to other agricultural categories from Ukraine if it is proved that their imports pose a threat to the European internal market. In particular, sunflower oil is at risk.
"In this way, both Ukraine will preserve its export capabilities and continue to feed the world, and our farmers will not suffer," said European Commission President Ursula von der Leyen, approving the agreement.
At the same time, Foreign Ministry spokesperson Oleg Nikolenko emphasised that restrictions on imports of Ukrainian agricultural products to the EU, for whatever reason, are unacceptable and do not comply with the Association Agreement with the EU.
"Yesterday, the Embassy of the Republic of Poland in Ukraine and the EU Delegation to Ukraine received notes from the Ministry of Foreign Affairs of Ukraine on the categorical unacceptability of the situation regarding trade restrictions on imports of agricultural products from Ukraine," he wrote. "There are all legal grounds for the immediate resumption of exports of Ukrainian agricultural goods to Poland, Romania, Hungary, Slovakia and Bulgaria, as well as the continuation of unimpeded exports to other EU member states and, in general, unimpeded transit of all Ukrainian products to other countries both within and outside the EU.
The day before, four countries – Hungary, Poland, Bulgaria, and Slovakia – have imposed a ban on the supply of a wide range of agricultural products from Ukraine to their markets. Transit, initially also banned by Poland and discussed at the level of some other countries, including Romania, was resumed on the night of 20-21 April. At present, it is being carried out with the need to unload the huge queue of thousands of railcars that have accumulated near the western borders. Its rules have become much stricter: in particular, vehicles are sealed by the transit country.
During the week, the European Commission negotiated with representatives of Eastern European countries that have complained about the dominance of Ukrainian grain. While at first European officials had strongly condemned the unilateral import démarche of the EU member states, later the question was not "whether it was worth banning" but "which goods were to be banned".
Mind looked into how the rules for exporting Ukrainian agricultural products would change in the next marketing season and how it could transform the industry.
Why are export restrictions on agricultural raw materials so critical for the industry? Growing exports and almost unlimited demand for Ukrainian products have been the main driver of the agricultural sector in recent years, after the preferential taxation regime hda been abolished. The average grain harvest over the past five years was 71.4 million tonnes, reaching 86 million tonnes in 2021. It was guaranteed sales that allowed us to invest in the industry and increase production volumes.
After the rapid restriction of foreign trade opportunities, production volumes began to fall steadily, and this trend is intensifying. While the market was overstocked in 2022, the country may actually face a shortage of some products in 2024.
Why can't we process everything domestically? Over the past five years, food consumption of grain has not exceeded 15% of the total amount grown. Population decline has further reduced this figure.
Read also: Foodie ban: What does the ban on agricultural imports and transit from Ukraine imposed by several EU countries mean?
However, is the export taking place now? After the downtime of 17-20 April, Ukrainian grain is being exported. Both by sea as part of the Istanbul Grain Initiative and across the western borders through the 'routes of solidarity'.
But there are nuances.
The maritime grain corridor is operating with an eye to russia's ultimatum, which recognizes it as legitimate only until 18 May – thus, in conditions of uncertainty and expectation of a blockade.
Overland exports are now limited to several countries at once and are carried out in transit to ports or end buyers. The correctness of this condition is closely monitored by the regulatory authorities of the relevant EU countries.
How has the transit format changed? The trucks with grain are formed into a convoy, undergo all the permitting procedures at the border, receive veterinary and customs certificates, and then have seals placed on them.
According to Michał Deruś, a representative of the Chamber of Tax Administration in Lublin, the convoy moves through Poland only on certain routes and is accompanied by two customs and tax service vehicles. When leaving Poland, seals are removed from the vehicles. The decision to re-seal is made at the discretion of the next transit country.
The new rules apply not only to grain cargo, but also to a range of food products that Poland has restricted. In particular, meat, dairy products, and honey.
The procedure is similar for trains. The difference is that the cars are sealed electronically, and the transit is controlled by the railway security service.
Since 24 April, Romania has been taking similar measures by sealing vehicles transporting Ukrainian agricultural products in transit. "The Romanian customs authorities will be installing seals on trucks carrying Ukrainian agricultural goods in transit," the State Service of Ukraine for Transport Safety said in a statement.
Ukrainian exporters assume that after the procedures are worked out and tensions are generally reduced, exports will be less regulated.
Read also: Agricultural logistics: Maritime exports are in crosshairs of russian sabotage, while ground ones stir up Europe
Is this the final format of Ukrainian foreign agricultural trade? No, it is not. These are just transitional measures to protect neighbouring markets from the influx of Ukrainian products at the moment.
Permanent or at least seasonal rules are now being developed by the European Commission, together with the six affected Eastern European countries.
And what will these new rules be? It is more or less certain that direct restrictions on a number of Ukrainian agricultural products will remain in place. These will definitely include wheat, corn, rapeseed, and sunflower seeds. However, this list did not satisfy European farmers, who last week refused to accept the conditions proposed by the European Commission.
According to unofficial reports, the list will be expanded to include eggs and poultry. However, this may not be the final version.
The ministers of agriculture of Poland, Bulgaria, Romania, Slovakia, and Hungary initially demanded that imports of sunflower oil, flour, honey, sugar, soft fruits, eggs, meat, milk, and dairy products be restricted. In fact, the Ukrainian side is making efforts to reduce this list.
Thus, we have already lost compared to the status quo of a month ago and even pre-war, and the question now is by how much.
Will the preferential import regime to the EU under the 'solidarity routes' introduced a year ago (duty-free and inspection-free) be extended, excluding these countries? In its current form, no. Although the European Commission promises to stimulate Ukrainian exports as much as possible. Thus, the most favoured regime will remain in some form, and it is a matter of prestige for the EC.
What changes can it bring to the Ukrainian agricultural sector? The first step is to correct the sowing wedge. Since corn has been a long-term leader in terms of exports (up to 60% of the total), it will show the highest dynamics of the decline in acreage. In 2019, it was almost 5 mln hectares.
As for how events will develop in the future in the context of limited exports, there are possible options.
Positive: Ukraine will gradually restructure its agriculture in favour of high-value-added, deeply processed goods. And with them, it will enter the EU market after becoming a member of the European Union.
Negative: agriculture will continue to stagnate, investment in it will decline, the spread between external and internal prices will increase even further, and Ukraine will lose its status as one of the leaders in the global agricultural market.
It is important to understand that, given the significant share of the agricultural sector in GDP and exports, the recovery of the entire Ukrainian economy directly depends on the recovery of the sector. The chances of the first and second scenarios happening are roughly equal.
Read also: Second wartime sowing: This year Ukraine sows record amounts of sunflower, with corn becoming unprofitable. What more to expect from the 2023 sowing season
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