By Ben Westcott, Pyotr Kozlov and Abdel Latif Wahba, Bloomberg
(Bloomberg) -- Tue Vuong had secured four cargoes of wheat harvested from fertile lands around the Black Sea, roughly a fifth of what his milling company 5,000 miles away in Vietnam uses annually. Then he was told it wouldn't get shipped following a summer escalation in Russia's war with Ukraine.
"I was very panicked," said Vuong, chief executive officer of Golden Wheat in Ho Chi Minh City. He was offered replacements for two of his cargoes with wheat from Bulgaria, but with a gap in his supplies, he spent weeks frantically searching for more. "We were too exposed to a crisis in the Black Sea."
The world's attention has been on the Strait of Hormuz and spiking oil prices because of the conflict in the Middle East. But the impasse in the Black Sea is compounding the economic damage by threatening to drive inflation even higher while undermining food security in vulnerable countries. Bond investors say food supply risks aren't yet fully priced into a market more focused on the cost of things like energy.
Connecting Europe and Asia, the Black Sea is a critical conduit for global crop shipments to some of the world's most populous nations. Russia and Ukraine make up more than a quarter of the global wheat trade, a share similar to the seaborne oil trade passing through Hormuz in the Gulf.
Supplies have been choked off since July when the countries stepped up attacks on each other's ports, pummeling grain terminals, silos and vessels. The escalation also hit Russia's energy infrastructure, sending diesel prices to records. A key input into farming, the cost of the fuel is another inflationary risk for food.
Egypt, the world's biggest wheat buyer, hasn't received any Black Sea grain in about a month. Russia's exports are throttled by Ukrainian drones, while Ukraine, with its ports blocked, is struggling to get its grain out by land or river. As harvests pile up, the country is also struggling to find enough storage.
Wheat prices have jumped to three-year highs, with few signs of a repeat of the deal Turkey brokered in 2022 to create a shipping corridor for blocked Ukrainian grains. Ukraine's western neighbors now have import bans on its grain after a local political backlash against support for the war-ravaged country.
"We can think of the Black Sea as important for global wheat trade as the Strait of Hormuz is for global oil trade," said Caitlin Welsh, a food security expert at the Center for Strategic and International Studies, a Washington-based think tank. "The world is underestimating the impact of these attacks."
Combined Russian and Ukrainian wheat exports are estimated to end up at roughly half what they were last year for the July to September harvesting period, based on figures from researcher SovEcon.
Russia and Ukraine also make up two-thirds of the global sunflower oil trade and a tenth of corn shipping. Their crops eventually filter through to anywhere from Egypt's bakeries and India's market stalls to Turkish flour mills and Vietnam's livestock and aquaculture industries.
Located just outside Ho Chi Minh City, Golden Wheat mills grain for flour and imports feed for animals, part of a growing sector working to meet Southeast Asia's burgeoning food demand.
The company was able to switch two boats to load Bulgarian wheat from Burgas, 500 kilometers (310 miles) down the coast from the Ukrainian port of Odesa. Vuong stayed in constant touch with the sellers to ensure it was on its way.
He also scoured the legal terms of his supply contracts and insurance premiums. He monitored news and the movement of vessels, anxious not just about their exit from the Black Sea but their transit through the Red Sea, which is under threat from Iran-backed Houthi rebels.
"Although the vessels were insured, if they had been attacked, we would have faced shortages," he said. To replace his two missing or stalled cargoes, he turned to the US, though it came at a much higher price tag. Since then, the prices have only gone higher.
Other nations are trying to source grains from France, which loaded a first wheat shipment bound for Sudan in 18 years. Libya tapped the port of Rouen for the first time in more than a decade, according to data from local shipping agents.
Turkey, the United Arab Emirates and others have turned to the Baltic states of Lithuania, Latvia and Estonia. Bangladesh is looking to growers like Romania and Argentina, while securing small quantities of wheat from India, which recently scrapped a years-long ban on exports. Buyers are also approaching less obvious places for this time of the year, like Australia that's yet to collect this year's harvest.
(Sign up to the Business of Food newsletter for a weekly catchup on how the world feeds itself in a changing economy and climate.)
"Every day we're fielding inquiries from all over the world," said William Reid, wheat trading manager at CBH Group, one of Australia's top grain merchants. "It's been extraordinarily busy. We have to ration some demand because we can't literally continue to lose that volume of wheat."
Supplies from other key breadbaskets are limited too. Droughts have curbed wheat and corn yields in the US and Europe's crop got hurt by this year's heat waves. The crunch is expected to escalate this month, as countries chewing through reserves ramp up buying and Southern Hemisphere harvests have yet to start.
This time of the year coincides with the peak of the summer crop-export season and both Russian and Ukrainian governments are scrambling to secure exit routes for their crops. Circumventing the Black Sea is difficult because the capacity elsewhere is limited, underdeveloped or pricier.
During a BRICS summit in India this month, Russian Agriculture Minister Oksana Lut tried to strike a reassuring tone, saying millions of tons of Russian grain were being shipped via Kazakhstan or the Baltic and Caspian seas. The country is also turning to the Far East to get grain out.
But that comes at a cost. While Russian volumes transiting Baltic countries surged, that's now prompting Latvia and Lithuania to consider restrictions. Using the Far East, meanwhile, adds thousands of miles of rail haul that's more expensive than ocean freight.
"This is more painful and more frightening than a blockade of the Strait of Hormuz is for the oil market," said Yevgeny Karabanov, the head of the analytical committee of the Grain Union of Kazakhstan, which imports Russian wheat overland. "No one can quickly ramp up grain production elsewhere enough to replace the lost volumes."
Wheat trades on thin margins so the cost of transportation can make or break a deal. To ease the impact, Russia plans to pause export duties on grains and is offering subsidies to encourage rail transport to alternative ports.
But even if alternative routes were to work, there is no escaping the Black Sea, which makes up more than 70% of Russia's grain exports. And should a peace plan emerge, the infrastructure will take months, if not years, to repair.
Arguably, Ukraine has even a bigger problem. The ports around Odesa, which is under a regular barrage of Russian missiles and drones, usually handled about 90% of its grain exports.
Agricultural shipments, meanwhile, generate more than half of the country's export revenue and its budget is already under strain. Ukraine's new prime minister described the national finances as "close to critical" this month.
The new harvest is filling storage, depressing prices at home and leaving farmers facing hefty losses. Ukraine's grain storage capacity could be full by early November and some farmers have been resorting to plastic silo bags.
Kyiv is trying to expand shipments through Romania's Constanta port, though low Danube water levels are complicating those efforts and alternative routes — mainly along the coastlines of Romania and Bulgaria — are getting clogged, too.
A backlog of roughly 80 — mostly smaller — vessels has built up around Ukraine's Danube ports as traffic is forced away from its major deep-sea terminals in the Black Sea, according to ship tracking data compiled by Kpler and Bloomberg.
Road and rail have emerged as important routes, but they are also showing problems. With men needed on the front line, Ukrainian drivers may not be allowed to leave the country, while some of those who get permission to travel abroad may decide not to return.
Bulgarian trader Preslav Raykov faced delays when trucking Ukrainian sunflower seeds and oils into Bulgaria. "After the truck crossed the border with Moldova or Romania, depending on the route, the driver just left the truck and ran away," Raykov said. "The drivers were fleeing, leaving the truck with cargo. The sellers were forced to find a substitute driver."
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