Supply Chain Resilience

The Golden State grows (and typically processes and packages) about 13 percent of total US agricultural sales. Almost twenty percent of US dairy production occurs in California. The state is the leading source of fresh fruits and vegetables consumed in the United States, including over 99 percent of almonds, clingstone peaches, dried plums, raisins, and olives.

According to the US drought monitor, all of California is currently experiencing drought conditions. The most productive agricultural regions of the Central Valley are experiencing “extreme” or “exceptional” drought. Some studies suggest the current drought may be the worst in 1200 years (more and more).

Despite these conditions, California subsoil moisture measurements are, so far, less than apocalyptic (see map below and more). According to the USDA, as of July 31, eighty percent of California crops had “adequate” moisture, fifteen percent was “short”, and only five percent was “very short”. Irrigation often explains why California moisture levels are currently doing much better than Iowa’s.

Proportions depend on what, when and where is measured, but at least 40 percent of California agriculture is irrigated. Credible estimates suggest up to 80 percent of agricultural sales depend on some irrigation. Irrigation is provided by local groundwater pumping and long-distance canals (that also provide water to urban areas). In response to the drought, several constraints have been placed on irrigation and other water use.

According to Bloomberg, spot prices for water in California are up 56 percent since the beginning of the year. “The soaring prices are a reflection of how quickly California’s water crisis is escalating, with dire implications for food crops that are almost entirely reliant on irrigation. Historic drought has cut off surface water to even those with the most seniority under California’s complex water-rights system, and California Governor Gavin Newsom has declared a state of emergency, ordering water-use restrictions and some curtailments for irrigation districts and farmers. ” The spot price has continued to increase since the Bloomberg report, see chart below (more and more). Given the long-term drought, California groundwater reserves are being drained and not replenished.

Downstream demand always depends on upstream capacity. In the case of California agricultural production what is literally upstream has been reduced for most of this century and the pace of reduction has recently accelerated.

[Updates below] Today at 0948 local time the bulk carrier Razoni departed Odesa, Ukraine for Tripoli, Lebanon carrying 26,000 tons of Ukrainian corn. This is the first shipment to leave a Ukrainian Black Sea port since the war began on February 24. The Razoni is one of seventeen cargo vessels trapped when the war began. Together these ships hold almost 580,000 tons of grain.

On July 22 Ukraine and Russia signed agreements with the United Nations and Turkey to open safe corridors through the war zone from Odesa and two other ports. The next day Russian missiles hit near Odesa’s port. Sunday a drone-delivered bomb exploded at the headquarters of the Russian Black Sea Fleet in Sevastopol. Given these and other provocations, the Razoni’s (Reasonable in Croatian) sailing is a crucial step in restoring global grain flows. (On the map below the Razoni is circled in red, as of about 0430 Eastern.)

More than 20 million tons of last year’s harvest have been blocked by insufficient alternatives to Black Sea ports. Rail links to Baltic or North Sea or Mediterranean grain terminals are complicated by lack of capacity and different track gauges. The Romanian port of Constanta (shown on map below) is handling more Ukrainian grain than before the war, but was already at capacity moving Romanian, Bulgarian, Serbian, Hungarian, and Slovak grain. Truck and rail connections between Constanta and Ukraine were not designed for high volumes (more and more and more and more and more). This year Ukraine’s grain exports have been slashed by more than half. High volume channels are seldom flexible or easy to replace.

According to the New York Times, “An additional estimated 40 million tons — of wheat, rapeseed, barley, soy, corn and sunflower seeds — is expected to be harvested in the coming months. Storage facilities not destroyed by Russian shelling are filling up, and room is growing scarce for the freshly reaped crops.”

Extracting loaded ships that have been trapped in the war zone is one thing. Convincing more ships — and their insurance carriers — to trust the safe corridors will be even more challenging. An initial $50 million in cargo coverage was put in place last week. The status of loading infrastructure at the three “safe corridor” ports is also not entirely clear.

According to the Financial Times, “Another 16 ships are awaiting departure… The conflict has left as many as 47mn people globally at risk of acute hunger, according to the World Food Programme.” (more) People in thirty-eight nations are especially vulnerable to any significant disruption of Black Sea grain flows. Below is a chart developed by S&P using FAO 2021 data differentiating these high risk consumers of Ukraine’s and Russia’s grain.

There is profound demand, but not always effectual demand. There have been significant reductions in current distribution capacity and cause for serious concern regarding next year’s grain production and distribution capacity. The departure of the Razoni is good news. Its arrival in Lebanon may well be lifesaving. Will sixteen more ships soon follow? If so, will that be enough to renew maritime cycle times for at least three Ukrainian ports? Many were holding their breath this morning. Deep breathing is advised for the month (and more) ahead.

Cargo Ship Razoni location at approximately 0430 Eastern (red circle off Odesa)

+++

August 2 Update: In an interview with the Financial Times, Ukraine’s infrastructure minister, Oleksander Kubrakov, said he expects no more than five vessels to leave in the next two weeks from Odesa, Chornomorsk and Pivdennyi. In recent years these three ports have discharged roughly 60 percent of of Ukrainian grain exports, often in carriers with double or better the cargo space of the Razoni. Still, Kubrakov aims to receive the first new cargo carrier before the end of August.

August 5 Update: Three more bulk cargo ships have departed Ukrainian ports. The first new ship is being inspected on its way to Chornomorsk (between Odesa and Constanta).

August 7 Update: According to Bloomberg, “A flotilla of four grain vessels sailed early Sunday from Ukraine’s Black Sea ports, Infrastructure Minister Oleksandr Kubrakov said… The Liberia-flagged Mustafa Necati and the Star Helena, Glory and Riva Wind, which all sail under the Marshall Islands flag, have almost 170,000 tons of agricultural products on board, he said. The exact contents of the cargoes and their destinations is unclear.  Late Saturday, the cargo ship Fulmar S arrived at Chornomorsk, the first incoming vessel since Russia’s invasion of Ukraine in February. “Our next step is to ensure the ability of Ukrainian ports to handle more than 100 vessels per month,” Kubrakov said.  

August 8 Update: Today the third of three ports designated as points of origin for a Black Sea humanitarian corridor saw off its first grain shipment since the war began. The bulk carrier Sacura departed Pivdennyi, north of Odesa (see map below, Sacura in the lead) to rendezvous with the Arizona out of Chornomorsk and continue toward inspection outside the Bosporus. Ten grain ships have departed these three Black Sea ports since August 1.

August 13 Update: The Financial Times has a good update on the circuitous “rest of the story” for the Razoni with helpful insight into the complicated realities of global demand and supply.