Grain Crisis and Polish-Ukrainian Relations [PODCAST]

In this episode of the Liberal Europe Podcast, Leszek Jażdżewski (Fundacja Liberté!) welcomes Hanna Cichy, Senior Business Analyst at Polityka Insight, who analyses macroeconomic data, public finance, and labor market. They talk about the Ukrainian grain crisis, its economic and political context, the role and response of Poland and other EU countries to the issue, and the way forward for Ukrainian-Polish relations.

Leszek Jażdżewski (LJ): What is behind the recent grain crisis?

Hanna Cichy

Hanna Cichy (HC): There are layers to it. First of all, the Polish agricultural sector has found itself in quite a difficult situation, because the costs of production are high – for example, of fertilizers, fuel needed by the farmers, and labor costs. This is a problem that can recently be seen basically across the whole economy.

Another layer is political in nature. Agriculture in Poland is highly politicized. It resembles the coal mining and the energy sectors more and more. The producers and the agricultural community are used to being treated very well by politicians – especially close to elections. This is the time when politicians are willing to promise them protection from any troubles – including external competition. Here, the Ukrainian grain enters the scene.

Ukraine is more competitive on the agricultural market than Poland. It will always be like this – and it is not only because Ukraine does not have to follow the EU rules (for example, in terms of the use of chemicals). Moreover, the structure of agriculture is different – Ukraine has big companies, whereas the Polish agriculture is based primarily on small- and medium-size producers, which makes it not as efficient or technically savvy. Ukraine also has better soil and climate, which we cannot change, therefore, it will always be more competitive than Poland.

So, on the one hand, Polish farmers feel threatened by the cheaper imports of Ukrainian grain. On the other hand, we have an upcoming election, so the situation is quite explosive. If we look at other countries bordering, they are in a similar situation (or even a worse, because they are smaller and have smaller production capacity). However, they have a different approach to the current situation.

For example, Romania was aware that there will be a problem with Ukrainian grain – not only last year, but also in the following years. So, they tried to figure out what can be done to not only not lose on it, but maybe even to gain something from it. As a result, Romania started investing in transportation capacity. Now, they ear money as being a transportation hub for the Ukrainian grain.

Meanwhile, the Polish government did a lot of talking about the transit capacity, the port infrastructure, and the storage infrastructure. Despite that, there was not much action. There has been some governmental support for building grain silos, but the funds have only been distributed this summer, while we already knew that there is going to be a problem for almost 18 months. For the past six months we were aware that the problem is here to stay.

LJ: The price of grain seems to be set in a global market. Why is the export of grain on the global market through Poland such an issue for the domestic prices in Poland? Is it because of the proximity of the Ukrainian market? Why has it become a much larger issue now than ever before?

HC: There are no easy answers. Grain is a commodity the price of which is set on the global level. The problem lies in the difference between the expectations and the reality the Polish farmers face. Last year, the prices skyrocketed after the Russian invasion of Ukraine. Maybe some people though that the prices will always be this high.

Actually, even the then Polish minister of agriculture, Henryk Kowalczyk, last summer told the farmers not to sell their grain weight for the current prices as they would increase. Pretty much from the moment he said it, curiously enough, the prices started to drop, because when Ukraine started to export grain from the Black Sea corridor or untapped some other channels (for example through Romania and other European countries), the prices normalized.

This year, the harvest was relatively good across the world, whereas the demand for the grain is moderate, so the prices are even lower than before the Russian aggression. But humans like to blame someone for their hardships, so if they see a truck or a train loaded with Ukrainian grain passing through their fields, they thin that it is ‘this guy’s fault,’ right?

I will not say that the Ukrainian grain did not stay in Poland. There probably have been some local market disturbances – especially in the eastern part of Poland because the Ukrainian grain was cheaper than the one produced on that territory. Meanwhile, the Ukrainian producers preferred to sell it close to the border, because this way they cut down on the transportation costs – the road and rail transportation is simply very expensive. And if the prices are set globally, this means that there is less money for Ukraine.

Nonetheless, this year should have been different than the last year, because back then Ukraine had the harvest from a previous year, which were unsold before the war – and that was a record harvest. However, this year, the harvest is smaller, and the quality of the grain is worse.

Actually, the quality of the grain is worse both in Ukraine and Poland simply because of the weather. In theory, this would mean that both these countries need good-quality grain, so there should not be a problem with either the good quality grain exports from Ukraine (because they do not have it), or insufficient demand on the Polish side.

A good example of how the price is set at the global level is the poultry sector. Recently, Ukraine has been exporting a lot of its chickens to the European Union. They are not going to the Polish market but are directed at other European markets. At one point, the prices in Europe fell significantly. As a result, the Polish exporters of chickens also could not earn on exporting their chickens to Germany, France, etc.

The problem is not only political, but also has an economic dimension. We have opened our market to a big, efficient competitor with a good natural situation and big specialized companies, which we do not have so we cannot compete with them. The problem is how we approach this situation because the government is not really trying to find long-term solutions. For example, there is not much talk about how we can make the Polish agriculture more competitive or how can we cooperate with Ukraine (for instance, to ensure a higher level of value chain).

The bond between Poland and Ukraine is very strong in terms of processing food, as Ukraine does not really have this sector – it is very weak, it does not know the European market, nor is it as innovative or as advanced as the Polish industry. Therefore, in theory, we could both profit from this situation. We could buy the Ukrainian grain and make pasta with it – it is as simple as that. However, when the politics, emotions, and elections come into the equation, it stops being simple.

LJ: A couple of days ago, the EU lifted the ban on imports of the Ukrainian grain. What was the rationale for installing the ban in the first place? Can the Polish and European farmers in general feel safe?

HC: The European Union introduced the import ban temporarily at the time when there were problems with the Black Sea transit channel. It was clear that the ban will not stay in force forever. What the EU wanted to achieve was to give the bordering countries the whole agricultural sector time to prepare for this – for example, to sell what is in their silos or to think about how to improve transit. Some countries did that, whereas other did not.

The reaction from other neighboring countries is different also on the political level. Poland has been on a war path with the European Commission for many years. This is the reason why the reactions of Poland and Hungary are very much in line – Hungarians are even more radical in this regard, as they extended their import ban on almost twenty-five agricultural products.

Meanwhile, Slovakia felt it was not ready and wanted to extend the ban only for 30 more days and wanted to come together with the EU and Ukraine and talk about how to prepare for lifting the ban after that period. This, of course, is a completely different discussion. If you indicate that you need more time and a discussion to prepare, the result is Ukraine saying that it is okay and that they will give you this time and so they withdrew the WTO complaint against Slovakia.

Meanwhile, Poland said, ‘You are ungrateful, you do not appreciate what we are doing for you, the EU does not understand us, and we will protect our agricultural sector at all cost.’ In this context, there is not much space for a conversation. It could have been different if the election was not approaching. And so, the situation deteriorated unexpectedly fast. The meeting of the presidents in the United States was expected to lead to de-escalation. However, this did not happen. This was the first time in the last two years that we did not see the presidents being friendly, but instead actually openly fighting.

LJ: Is it possible that after the election the situation will de-escalate? Is there any room for maneuver in terms of imports to Poland? Or, perhaps, the new government will need to face a very similar situation? Will this be an issue that will determine the Polish-Ukrainian relations for years to come?

HC: There are middle paths. We could have been increasing our transit capacity within the last year and a half. Of course, it does not happen overnight. There are not many signs that anything is really happening on that front.

Another thing, which could actually be done overnight (and the Ministry of Agriculture has been speaking about it for a few months already, but has not yet done anything) is a written agreement with Latvia and Lithuania to move the sanitary controls from the Polish-Ukrainian border to their ports. This would increase the transit capacity. It would not solve the problem, but it would offer some relief.

It is the magic of small numbers. Before the war, the imports of grain from Ukraine to Poland was very small. It did increase significantly, so the numbers might be shocking, but the starting point was very low.

In the long run, this will pose a serious problem for the future of the relations between Poland, Ukraine, and the European Union. What the Polish political class would need to think about how other countries felt in 2004, before the enlargement and Poland joining the EU. Poland was a big country  with a population willing to emigrate, and a big agricultural market. It is pretty much the same story as the Ukrainian one now.

Therefore, Poland should think about how can we cooperate with Ukraine and make some things together – not only food, but also, for instance, steel products. Ukraine is a great exporter of commodities and raw materials. We can use it to finally do what we have been thinking about for so long – move up the value chains, make more sophisticated products, and export it for higher margin. We can buy Ukrainian food commodities and process it (even invest in processing plants in Ukraine). As a result, we could earn money together by selling the products to Germany, France, and the rest of the world.

However, if politicians remain short-sighted and focus only on the outcome of elections or opinion polls, telling farmers that they will be protected no matter the cost, then it will create great tensions within the EU and will make us miss on the opportunities. The Polish agriculture is not and will not be competitive – we will be getting less competitive even without Ukraine joining the European Union.

Before the war and the grain crisis, there was a big discussion on how the European Green Deal will affect the Polish agriculture. It is the same story. We are not willing change and embrace the future. We are holding onto an outdated socio-economic structure in the rural areas. This needs to change. The same applies to the energy market – if we are willing to protect miners at all cost, we end up with expensive, unstable, and toxic energy, a big social problem, and a sever conflict with the European Union. We are heading in the same direction with the agriculture.

It is vital for Ukraine to sell the grain, but at the end of the day it end up on someone’s plate. We must think about it as well – not only because it is the right thing to do from a moral point of view, but also because if we do not feed the hungry, these people will mount boats and get across the Mediterranean, which will cause other tensions within the EU.

This podcast is produced by the European Liberal Forum in collaboration with Movimento Liberal Social and Fundacja Liberté!, with the financial support of the European Parliament. Neither the European Parliament nor the European Liberal Forum are responsible for the content or for any use that be made of it.

Continue exploring:

Impacts of the Russian War in Ukraine on CEE: Review No. 19 Now Available Online

Turning Point for Future of Europe [PODCAST]

European Liberal Forum