The pace of grain exports from Ukraine through both sea and land routes continues to decline, and the prospects for maintaining trade volumes remain uncertain. Due to unilateral bans imposed by European countries and subsequent restrictions introduced by the European Commission, the forecast for agricultural exports in the second quarter has been reduced by approximately $200 million, according to the National Bank's estimates. This scenario is already beginning to materialise: the share of grain in the total cargo of Ukrzaliznytsia (“Ukrainian Railways”) decreased to almost 21% in April, compared to 47% in March. The average daily loading rate is also decreasing systematically (73,000 tonnes versus 77,000 tonnes in the previous week). In April, 1.9 million tonnes of grain were shipped by rail, but only 458,000 tonnes were exported through western border crossings. 341 cars with grain are sent per day, which is 42% or 249 cars less than in March.
Sea exports through the Black Sea corridor under the Istanbul Agreement are also being hampered by russian sabotage, as its inspectors intentionally delay the inspection of Ukrainian vessels in the Bosporus, which is a mandatory condition for their passage. Due to systematic delays and downtime, exceeding a month in some cases, sea grain trading is also inefficient. It is confirmed by its statistics: during the corridor’ best periods, 5.5 ships passed inspection per day – now this figure barely reaches two. Overall, since the start of the "grain corridor" on August 1, 2022, up to April 23, 2023, 28.8 million tonnes of agricultural products have been exported through it.
Unfortunately, all of this is difficult to classify as temporary difficulties.
The EU's radical position regarding Ukrainian agricultural products clearly has demonstrated that trade with European partners is being built in the coordinates of harsh protectionism. As for maritime exports, the risks of its sabotage will remain high until complete demilitarisation in the Black Sea.
Another negative factor is that the category of commodities will always be the most vulnerable and prone to changes in market conditions.
As noted by Viktor Sheremeta, the Vice President of the Association of Farmers and Private Landowners, the logical choice in this situation is to develop industries adjacent to grain production and sell them domestically, transforming them into high-value-added products. "Then there would be no need to export grain, and it would be beneficial for both people and the country. It would kill two birds with one stone – not exporting grain because it is difficult, and providing the domestic market with quality organic products," Sheremeta said in a comment to Ukrainian Radio.
Full-scale war and problems with exporting agricultural products, however cynical it may sound, could accelerate the transformation of the Ukrainian sector from a raw materials model to internal processing. Internal processing usually refers to the use of grain as a feed base in animal husbandry. However, it is not the only, and not always the most profitable, way, and in conditions of hostilities, it is also high-risk.
Mind investigated: what can Ukrainian grain be transformed into to sell it at a high price without any problems.
What are the harvests in Ukraine after the February 24, 2022 escalation? The average grain harvest in Ukraine over the past five years has been 71.4 million tonnes. In 2021, a record of 86 million tonnes was achieved.
In 2022, the harvest decreased, but not radically – mainly due to the winter crops planted before the escalation, it amounted to 66 million tonnes. The wheat harvest reached almost 21 million tonnes – the ninth result in the world.
Expectations for 2023 are more pessimistic. The harvest forecast is in the range of 48-55 million tonnes, which corresponds to the industry's performance indicators of a decade ago.
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If the harvest drops almost by half, is there excess for processing? Yes, there is, as the market remains significantly surplus. New balances have not been announced yet, but considering the outflow of population and the decrease in the number of processing enterprises due to occupation and destruction, it is likely that domestic demand has fallen more than supply.
Wheat and rye are currently predominantly used for the food market, with barley and maize flour in small quantities. Many crops are still not covered by processing or are covered to a small extent.
What crops does Ukraine grow, and which have the potential for processing? Ukraine grows six main crops – wheat, maize, barley, sunflower, soy, and rapeseed. They account for about 85% of arable land, with a total area of 27-28 million hectares (as of February 24, 2022).
Theoretically, they can all be processed within the country. However, it should be noted that some of them, particularly rapeseed, still have high export potential.
What is hindering the development of processing?
- Lack of investment in enterprise development
- Lack of clear sales markets
- Difficulties with logistics
- Deficit of personnel due to emigration and mobilisation
- Deterioration of infrastructure, particularly in production and storage facilities.
Do we have enough processing capacity? No. Furthermore, in some promising segments, the processing is completely absent in Ukraine. The remaining enterprises have significantly increased their workload due to the cessation of their colleagues' activities in the north, east, and south of the country. These oblasts now depend on imports of products from other regions instead of self-sufficiency. However, it will be the first step towards development.
After the acute phase of the war ends, experts expect the emergence of mini-processors in the regions that will expand sales locally and abroad.
Read also: The year of unbreakable strength: How the agro-industrial complex fared over the past 12 months and what it will face in the new agricultural season. Views of market participants
So, what can grain be processed into?
Flour. In 2021, around 1.4 million tonnes of flour were produced. The total flour production capacity in Ukraine at that time was over 7 million tonnes per year and was nearly half utilised.
Flour mills consumed about 4 million tonnes of wheat per season, and even using existing capacity at 100% would allow for 8 million tonnes of grain to be removed from the market. This estimate does not take into account the 'grey' flour market, which is estimated at 25% of production.
Increasing processing is not possible without parallel export development. Prior to the escalation, Ukraine sold only around 100,000 tonnes of flour to foreign markets. The main buyers are South Africa, the CIS, and the Middle East. The UAE has remained the main importer for many years.
Cereals. The production of cereals in Ukraine is around 300,000 tonnes per year, and this figure is weakly subject to fluctuations. Since domestic demand is not increasing, and in some categories, even falling, the driver of processing can only be export. And today it amounts to about a quarter of production – 50,000-80,000 tonnes.
It is important to understand that classic cereals are becoming less and less in demand on the foreign market – consumers are switching to flakes, flattened grains and muesli.
Buckwheat is the undisputed leader in consumption in Ukraine among all cereals – about 2.6 kg per person per year. However, the rest of the world, with rare exceptions, does not share this love. In addition, the growth of export potential is hindered by permanent difficulties with growing and a shortage of buckwheat. Buckwheat is exported to Israel and CIS countries, and if a breakthrough in trade is worth waiting for, it is only in the segment of buckwheat flakes.
The production of cereals would partially help to process corn, which has formed an obvious surplus (especially in the last season), and some of it has remained unharvested in the field. Although the consumption of corn porridge itself is small – only about 0.5 kg per person – a drop in raw material prices could increase its popularity. Corn flakes are also one of the most promising categories for export.
Production, consumption, and export of oat groats are stably growing. It is being facilitated by the trend towards a healthy lifestyle and even the variability of the finished product forms.
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Starch. In 2021, Ukraine produced around 150,000 tonnes of starch, with 90% of production concentrated in the Dnipropetrovsk oblast. Corn (about 95% of the market) and potato starch are mainly produced. There is also wheat starch production in small quantities.
70,000 tonnes of various types of starch are for domestic consumption, while about 70% of the produced starch is exported. Importing countries include Indonesia, the EU, the CIS, and the Far East.
Starch production has a complex positive effect. It not only allows the processing of corn but also has a wide market. Starch is primarily associated with the food industry, but it is also used in the pulp and paper industry, textile production, pharmaceuticals, and other industries.
The obstacle to the development of the starch market in the food industry is the trend of reducing gluten consumption.
Maize and other syrups. Pancakes with maize syrup are an essential attribute of the American breakfast, but in Ukraine, this product in its pure form is almost unknown. The syrup is a product of deep corn processing and is actively used in the food industry.
Ukraine produces glucose, maltose, and fruit syrups, exporting about 50,000 tonnes of these products annually. Buyers are countries in Asia and Africa, China, and the CIS.
Another export position is fructose, which is produced in the process of starch processing.
Compound feeds. It is a very specific market in Ukraine that primarily operates through direct orders from a specific buyer – a farmer or animal breeder with the required recipe. More than five hundred companies produce compound feeds with a total capacity of over 20 million tons per year, which is currently excessive. In addition to compound feeds, these players produce various additives and premixes.
The most efficient producers are structural units of vertically integrated holdings that produce compound feeds for a related company. Feeds for pig farming and poultry farming are mainly exported, with customers being the CIS countries and Turkey.
Others. Another opportunity for processing development is the production of bran, which is actively used in animal husbandry. In Ukraine, wheat bran is mostly produced, but the processing of barley, rye, and oats is also growing.
In 2021, producing around 570,000 tonnes of bran, Ukraine exported 90% of this volume (nearly 500,000 tonnes). The main buyer is Turkey, which receives over 85% of exports.
Another direction is the production of eco-friendly utensils (containers, glasses, cutlery for catering and picnics) from starchy materials. The market for plastic-free packaging is predicted to reach $4 billion by 2027.
The market for specialised and functional food products that combine food and medical functions is also growing. It includes various gluten-free products, dietary goods primarily for children's nutrition, and vitamin-enriched beverages.
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