The uncertain future of the Black Sea grain deal: how it affects the pet food industry

When the Ukrainian invasion began in February, Moscow imposed a blockade on the Black Sea ports, which halted all agricultural exports.

The United Nations and Turkey put an agreement on the table establishing a protected sea corridor signed by both Ukraine and Russia in July 2022.

Valid for 120 days, the agreement that allows grain shipments from Ukrainian ports is up for renewal on 19 November 2022. This should be done automatically, but Russian President Vladimir Putin warned about the future of the agreement, saying that most of the grain is directed to Europe and not to “the poorest developing countries.”

“It is believed Putin will use the extension of the deal as leverage in the G20 summit in Indonesia on 15 and 16 November 2022. He is concerned about Russian grain and fertilizer exports too,” explained Megan Hesketh, Senior Analyst at UK’s Agriculture and Horticulture Development Board (AHDB).

According to experts consulted by GlobalPETS, Ukraine’s grain exports are already close to pre-war levels since the beginning of October 2022. But the risk of an imminent new disruption sends a red signal to the global food chain, including the pet industry.

Maintaining production lines

Ukraine and Russia are major grain exporters, accounting for around 25% to 30% of the world’s wheat exports. Companies across Europe, Africa, and Asia depend on the availability of these raw materials to maintain their production lines.

The European Pet Food Federation (FEDIAF) warns that the situation in the Black Sea is “increasingly challenging.”

“Given the highly volatile context, the pet food industry is currently impacted by the limited availability of these key raw materials as well as animal protein shortages. Thus, many manufacturers may need to switch to alternative oils and ingredients,” said a FEDIAF spokesperson to GlobalPETS.

Ulyana Fitsa, Chief Supply Chain Officer at Ukrainian pet food manufacturer Kormotech, explained at the Nordic Petfood Conference in Barcelona that companies in Ukraine are also experiencing a shortage and blockage of raw materials. Fitsa said that the company works on a range of new raw materials to develop new formulas to cope with the situation.

Exploring new markets

FEDIAF highlights that ingredients often cannot be replaced in a product as pet food formulations need to follow legal requirements for a healthy and balanced diet for the pets.

“To ensure continued food supply, pet food manufacturers have been taking appropriate measures to adjust their sourcing practices, occasionally embracing increased prices of raw materials in a low supply environment,” added a spokesperson from the Brussels-based trade association.   

As many companies cannot modify their formulas, some are trying to find the availability of primary products in alternative markets, such as South America.

A good example is Argentina, the third-largest exporter of wheat in the Americas after the United States and Canada, which is trying to supply the wheat deficit in Western markets.

“New companies came to South America in search of grains that were lacking in the European market, but they had to adapt to a higher reality in prices,” explains market analyst Carlos Cogo from the Brazilian city of Porto Alegre.

Volatility

Cogo highlights that Brazil has already exported 31.1 million tons of grain to the world this year, 113% more than in 2021.  

“We exported 2.5 billion tons of wheat between January and October 2022. In addition to the traditional Brazilian markets, this year we managed to expand to African, Asian, and European countries,” he said in an interview with GlobalPETS.

When the Black Sea grain deal started to work, wheat prices dropped to around $7 per bushel, a measuring unit used mostly for agricultural products, and that equals approximately 35 liters.

“The contracts that farmers here in South America are managing to close are already above this value, reaching between $8 and $9 per bushel, which shows that the market is still worried about shortage supply and that producers are closing very advantageous contracts by analyzing the prices,” Cogo added.