EU Purchases Of russian Grain Spike 10x. Is "Economic Expediency" Beyond Survival Instinct?

Photo by: Latifundist.com

While Ukrainian growers are estimating losses from the war, reduced planting areas, low prices and complicated logistics, russia celebrates that trade with the EU has picked up significantly.

According to Eurostat, in 2023, purchases of russian grain jumped by 22% per month and 10 times per year. Latifundist.com analyses why Europe is increasing its exports from russia by restricting Ukrainian grain.

Who is the top buyer of russian grains and pulses in the EU?

From July to December 1, 2023, the aggressor country shipped 2.23 million tons of grains and pulses to the EU, more than 2x up YoY — 968,000 tons, according to the russian grain union.

The largest importers:

• Spain 40%. Shipments to this country grew 8.8x (850 thousand tons compared to 96 thousand tons in the same period last season);
• Italy 35%. Purchases increased by 7.7x (812 thousand tons vs. 105 thousand tons);
• Belgium 17%. The increase made up 3.7x (198 thousand tons vs. 52 thousand tons);
• Greece intensified purchases by 1.9x (160 thousand tons vs. 85 thousand tons).

Latvia is also among the largest consumers of russian grain, although shipments to this country fell to 105 thousand tons from 410 thousand tons in 2022, as reported by russian Interfax.

Spain bought the most peas — 571 thousand tons, russian analysts calculated. Italy became the largest buyer of russian durum wheat in the EU — 583 thousand tons. Flaxseeds dominated supplies to Belgium. Greece increased its purchases of wheat to 108 thousand tons and corn to 26.2 thousand tons.

"No sanctions and customs blocks can stop it: imports of durum wheat for pasta from russia grew by 300 thousand tons in the first 9 months of 2023. It has become the second country of origin," writes the Italian media outlet Salvagente.

The rising demand for durum wheat is explained by a 7.7% decline in local durum wheat yields as a result of adverse weather in the main producing regions of Puglia, Sicily and Emilia-Romagna.

"It is evident that European sanctions imposed on moscow after its invasion of Ukraine failed to work: through cooperation with Turkey, durum wheat (and soft wheat, which was the subject of an agreement with Ukraine) is flowing to Europe and especially Italy," the publication reads.

As for the grain itself, in 2023, procurement increased by 22% per month and 10 times per year, according to Eurostat.

Ukraine remains the key supplier of grain to the EU, although its share shrank by a quarter to 1.2 million tons over the year. Instead, Brazil and Turkey scaled up their exports to 1.1 million tons and 204 thousand tons respectively.

Routes for russian grain

Having sanctioned russia since the start of the full-scale war, Europe has not restricted the import of its agricultural products. Given the international situation, large companies are now very reluctant to provide information to the media about their cooperation with russia as they have simply transformed it.

"Most of what comes out is handled by russian traders who use (re-registered — ed.) vessels that international traders do not do business with," an insider told Latifundist.com.

By land, russian grain enters the EU through the Baltic states and belarus.

Karolis Šimas

President of the Lithuanian Association of Grain Processors and Traders

"The mechanism is very simple. The two largest kaliningrad-based companies export grain in transit through Lithuanian ports, request and receive permission to transport grain in transit through Lithuania. The Lithuanian freight forwarder pays the taxes. Then a Lithuanian company, the buyer of the grain, steps in and the russian grain enters the port, at one of the largest terminals, and safely goes to third countries. All duties are paid and permits are granted. And there are many such companies. Lithuanian intermediaries, freight forwarders, carriers, and logistics companies are involved in this scheme."

According to Šimas, russian grain exports through Lithuania jumped by 5 million tonnes in 2023 — from 15 million tonnes to 21 million tonnes.

The situation is no different in Latvia.

In January-November 2023, the country imported 333,225 tonnes of grain products from russia, up 51.5% from 219,959 tonnes in the respective period of 2022, the State Revenue Service (SRS) reports. In 11 months of last year, 1.975 million tonnes of grain products were transported from russia through Latvia, 2.3x more than in the same period of 2022, when 861,068 tonnes of grain was transported through Latvia. This was reported by a local online media outlet.

The State Revenue Service explained that goods that have been imported or released for free circulation acquire the status of European Union (EU) goods and circulate freely in the EU. They can be consumed in Latvia or transported to another member state without going through customs procedures, including transit.

"There's already a mockery among grain exporters that does not do Lithuania and Latvia any favours: Kaliningrad has the port of Klaipeda, and central russia has the ports of Liepaja and Riga," Karolis Šimas jokes ironically.

What is the amount involved?

russians attribute their success in the EU market to a more favourable offer relative to the cost of European grain.

"The discount averaged USD 14-15/t FOB from the wheat price offered by Europe from the beginning of the season to December 1," the Russian Grain Union commented.

Alexander Korbut, a russian grain market expert, says that the countries that imposed restrictions on russia turn a blind eye to them as soon as they see their economic interests. According to him, the growth of grain shipments from russia to the EU countries was facilitated by the increase in durum wheat imports from Italy: the country usually buys it from Canada and Germany.

"As soon as they ran out of durum wheat, they picked up purchases from us. But we need to understand that the EU is not the biggest market for us. It is more situational than permanent," Korbut told Agroinvestor.

The Ukrainian Grain Association believes that despite Ukrainians' justified indignation at this situation, European companies will be more likely to be guided by economic expediency.

"For them, it is higher than even the instinct for self-survival. But this does not apply to everyone but to some companies that make money on this," said Mykola Gorbachov, the president of the Ukrainian Grain Association.

Who is the foe?

The full-scale war has put Ukrainian farmers in an exceptionally tough situation. Market prices for grain are going down, including due to the enormous volumes of russian grain that the aggressor country is flooding the world market with, boasting that it has an impact on its pricing. The enemy is destroying Ukraine's port infrastructure. The danger caused freight insurance to skyrocket.

Mykola Solskyi

Minister for Agrarian Policy and Food of Ukraine

"In the ports of Big Odesa, the price for farmers has increased by USD 30. It is because freight has gone up. We have to pay for insurance. The railway has also risen in price, and transshipment in the port has risen in price. That's why logistics has become more expensive. But if you export through Romanian ports or alternative routes, it will be even more expensive by USD 59 or USD 112."

The President of the Ukrainian Grain Association, Mykola Gorbachev, confirmed that transporting grain costs Ukrainian producers twice as much as it does russians.

"The cost of transporting corn from Big Odesa to Spain, for example, is currently USD 42-44/ton, while wheat will be USD 2/ton more. This amount includes insurance (about USD 3.3/ton) and the freight itself," explained Gennadiy Ivanov, director of BPG Shipping.

Meanwhile, for more than six months now, farmers and transporters from neighbouring countries have been blocking the borders with Ukraine and demanding that the EU impose restrictions on the import of Ukrainian grain. Is this fair?

"The amount of Ukrainian grain that could pass through Lithuania is insignificant compared to the amount of russian grain that reaches third countries through the ports of the Baltic States. Yes, grain is a food product, and it is not subject to direct sanctions after russia's full-scale war in Ukraine, but isn't that a concern for us?" asks Karolis Šimas, president of the Lithuanian Association of Grain Processors and Traders (LGPPA).

On February 5, Latvian farmers protested, demanding, among other things, a ban on the import of food from russia and belarus without a transition period. If the demands are not met, they promised to go to Riga on February 12.

Paul Hughes, Chief Agricultural Economist & Director of Research, Agribusiness at S&P Global Commodity Insights, suggests that the problem of russian grain dominance should be solved by market mechanisms. He believes that the biggest problem for russia will arise if sellers in the EU reduce their prices.

"At that point, russia will have a choice. It will either keep the minimum [export price] level and give up a share of exports to the EU, or it will give up its lower level, cut the price and sustain the pace of exports," he told CNN.

He called this scenario a "moment of reckoning".

Violetta Gromova, Latifundist.com