The great corn war: Ukrainian goods missing, while Hungarian industry fed up with state regulations

In the space of a year, Hungary has intervened in the market for the same crops from two completely opposite directions. First, it regulated exports (because there was a threat of a shortage of goods) and then imports, for fear of a dumping of products from abroad, notably from Ukraine. The worry that the abundance of Ukrainian grain would be damaging to the country became the prevalent mood. Hungary wasn’t alone in this, but Romania, for example, chose a different path to deal with the situation.

After the measure was introduced, several people signaled Telex that they do not agree with it. As we have previously heard, there is a great tool for dealing with such shocks: the market itself, where supply and demand determines the price. A government may choose to regulate things, of course, but it is worth thinking twice about interfering in market processes, because such a move often leads to new, and typically even bigger anomalies.

With the help of experts – we will now use the example of the most important product Hungary imports from Ukraine, fodder maize, to show why the issue is very complex:

• How have Hungarian farmers speculated in the past?
• How can the import ban be easily circumvented?
• And why would feed producers, biorefineries and other processors also need Ukrainian supply sources in addition to the contaminated (toxin-contamination) domestic corn?

Oh, how we love to panic!

We'll outline the history of how we got to the import ban in a moment, but first we need to establish a few basic principles:

1. Ukrainian farmers would have preferred to skip this. As László Berta, managing director of Dunagabona told Telex, Ukraine used to load its grain and maize onto ships in Black Sea ports and export the goods to China, South Korea, and even Brazil and other markets. With the war, this transport route ceased to exist, and although it was re-established after a while, it was still laborious and slow. Naturally, it wasn’t the Ukrainians’ first choice to have their produce spend 2-3 days waiting at the Ukrainian-EU border instead of sending it directly from their internal ports.

2. Hungary reacted surprisingly quickly. When Ukrainian producers and traders needed land routes, Hungary developed the necessary rail routes, transshipment facilities, trade and financial mechanisms quite quickly – with government assistance – and as this Mandiner article or this Telex article shows, the Ukrainian-Hungarian produce traffic really took off.

3. The agricultural market likes to panic. Everyone’s familiar with the recurring phenomenon of those in the agriculture business always “crying” over something. If the weather was bad, there won't be enough crops. If the weather was good, there will be plenty of crops, but not high enough prices. If there is a shortage of goods, let there be an export ban. If there is an abundance of goods – there should be an import ban. And the government often listens to the pro-government organisations acting on behalf of farmers, which sometimes results in rushed regulation.

4. Fodder maize and wheat are bulk products. In other words, it’s impossible to distinguish Polish, Hungarian and Ukrainian fodder maize from each other. The product has no license plate, it is only accompanied with some sort of documentation. If there is an import ban, but the price difference is attractive, there will always be scoundrels taking advantage of this. The example often brought up about this in the market is that if – due to the price difference – someone were to gain €10 per tonne on 20,000 tonnes of maize, they could make a €200,000 (HUF 76 million) profit on a single deal. But what's the gimmick? The goods bought in Ukraine have to be transferred to Romania (we mentioned that there is no import ban there), and then a paper is issued for them in Romania. The 'Romanian' goods then enter Hungary, and the person who buys them sees only a paper that looks legit.

5. And finally, a very important circumstance: the toxin. Ferenc Hódos, the strategic director of Pannonia Bio, told us that his company mainly buys Hungarian maize from within a 150 km radius, but he believes that the reason why Hungarian customers have recently wanted Ukrainian maize wasn’t because it was cheaper or because it was Ukrainian, but because it was less or not at all contaminated with aflatoxins (more on this in a moment!).

A little history

Let's start the maize story with a look back, under the guidance of László Berta!

The Hungarian maize harvest was already bad in 2021. And then 2022 saw a record low harvest, with a third less being produced than in the worst year ever during the drought.

However, by 2021, output products produced with maize became very expensive. These included animal feed, poultry meat, pork, bioethanol (under Covid, there was also a huge increase in the sale of disinfectants, and ethanol is one of its ingredients), isoglucose, but most importantly alcohol, for which there was a huge demand.

Everything kept getting more expensive, including maize, and companies kept begging producers for goods, but couldn’t buy enough. This was partly due to lower production, and partly because producers were speculating, waiting for prices to go even higher. The lack of domestic supply in Hungary boosted imports, but at that time the import channels were mainly Serbian and Slovakian rather than Ukrainian.

A senseless export measure

At this point, the situation reached the point where, allegedly as a result of lobbying by the poultry lobby, the government introduced a pointless administrative measure (the 83/2022. (III.5.) decree), requiring traders to declare their intention to export.

Although the announcement wasn’t an export ban, the measure shattered the market to pieces. A trader cannot say to his customers, "Sure, I can supply you with this much maize at this price, provided I get a license from the Government in 10 to 12 days". The buyers didn't care, they bought what they needed from someone else instead. Even afterwards, traders complained that they didn’t know what to do with the export measure, as it wasn’t clear what they were supposed to do with the tens of thousands of tonnes already loaded.

"What should I do, keep paying for the rented, expensive wagon or unload it?”

– was their dilemma.

Then later, when the import ban came in, there was a similar problem of interpretation again, this time regarding the trains already on the road: will they be allowed in, or should we turn them back?

The price of rapeseed was 300-350 thousand forints per tonne, while the price of a tonne of maize reached 130-140 thousand forints – in 2021, the former ranged between 150-250 thousand, the latter between 70-90 thousand. In addition, a significant part of the drought crop (about one third) became toxic.

The aflatoxin

Unusually high levels of aflatoxin contamination in Hungarian maize have caused and continue to cause very serious problems, rendering a significant proportion of the crop unfit for food and feed use.

The problem with the toxin is that it passes into all products, eggs, yoghurt, meat, etc. It doesn't make you sick like salmonella, but it’s still a harmful toxin once it enters the human body. This fact, however, wasn’t enough to make Hungarian farmers want to throw out the toxic corn.

This was partly

because two-thirds of the toxic maize is still starch, and can be used for producing isoglucose, bioethanol and medical alcohol.

The rest, which is typically used to make feed and food, could not be used because only biogas can be produced from the toxic product, which is a non-food and non-feed product, Ferenc Hódos says.

Unfortunately, experts also suggest that this rule can be circumvented. In a paradoxical example, McDonald's, for example, inspects its suppliers, so it cannot be fooled, but a Michelin-star restaurant that buys chicken from a farmer can get into trouble. It is also not inconceivable that farmers mix up the old corn with the new, better produce and somehow sneak it in for buyers who they know will not properly inspect the product.

After the war

Meanwhile, the market for maize has changed. When the Russian-Ukrainian war broke out, it was high time for a price drop because of the previous years' increases, but the collapse of supply chains caused prices to soar again, and then the panic price increases were suddenly followed by huge drops.

This Anglo-French site shows that in just a month, prices have fallen by as much as they usually do in a year, and the price of some crops has even halved. In addition to crops, the price of fertilizer, for example, has suffered Armageddon-like price falls, with huge fortunes having been burned in purgatory.

However, the farmers and some purchases took this very badly. They used to sit on their huge stocks, wait things out, some even bought from others, but then they got stuck with the produce and would have only been able to sell their maize at a big loss.

And as Ukrainian imports really started to come in during the shortage, which had already helped keep the big biorefineries running since the drought last summer,

the scapegoat was quickly found: it was Ukrainian produce which made corn cheap.

Moreover, the Ukrainian corn was not contaminated, and the biggest buyers (Hungrana, Pannonia Bio, Kall Ingredients) had a vested interest in buying clean maize. This is because all producers pay close attention to contamination, as in addition to their main products (isoglucose, bioethanol) they also use parts of the maize to make products for animal and human consumption, but the toxic maize cannot be added to either animal feed or human food.

It was tested

At the time, there were various accusations against Ukrainian maize, such as dumped prices or contamination. There were also investigations into the Ukrainian imports, but when compared with Hungarian crops, it turned out that there was no problem, allegedly only a few tonnes were found to be contaminated.

In the end, Hungary did impose the ban, encouraged by the fact that similar measures were taken by Poland, Slovakia, the Czech Republic and Bulgaria. Ukrainian maize was indeed a bit cheaper for a while, when it could not leave the country but was available. This is no longer the case though.

Hungarian prices are currently lower, and the producers are waiting for the storm to pass, as they would suffer terrible losses if they sold their goods now.

Following the import ban, the price did go up a few euros, but it is always difficult to determine what caused it, there is no ceteris paribus analysis, no price analysis can be done with only changing one of the factors.

According to László Berta:

"Tomorrow’s a sci-fi, yesterday is history"

so it's hard to predict the future, but since there won't be a drought like last year’s this year, supply will be secured, so we shouldn't expect too much of a price increase.

The ban is in place until 30 June, but then a new harvest will come, producers will experience big losses, the price is currently low, warehouses are full everywhere, and administrative measures will not bring about better prices.

There are, however, many problems and negative consequences brought by the ban. Imagine that a measure comes out at dawn and has to be checked by the tax authority (NAV) or the National Food Chain Safety Office (NÉBIH) in the morning – this in itself creates uncertainty and difficulties.

But issues of content are also important. Several organizations have protested against the import ban. In their official statement, members of the Hungarian Biofuel Association (MBSZ) (Hungrana Kft., Pannonia Bio Zrt., Rossi Biofuel Zrt.) have also described the trends discussed in our article.

According to the association, however, quality corn and oilseeds are needed by biorefineries 12 months of the year, and recently only imports have enabled the processing industry to continue operating. Moreover, the products generated are essential for meeting renewable energy targets, for strengthening the country's export position (bioethanol, isoglucose) and improving the security of supply by providing feed capable of replacing imported soy.

The members of the MBSZ also argue that for them

quality is a top priority, so they themselves carry out a rigorous inspection of all the batches they use before processing.

We’ve been told that in these circles, everyone is constantly producing, building stock, signing contracts, but it is almost impossible to plan and work if one always has to worry about "which politician has spent too much time in the sun", i.e. you don't know what unexpected step will be announced on Thursday's government briefing.

The Grain Association also protested

The European Commission, meanwhile, has been working to ensure that the interests of the five countries imposing the ban are not harmed, but that other EU countries can buy from Ukraine and to ensure that the goods can reach other countries around the world.

However, the Hungarian Grain Association has also indicated its opposition to the ban on Ukrainian imports. The association stated that it doesn't support any market-restrictive measures. The association does not agree with the ban on imports of grain and oilseeds from Ukraine, especially in a season when, for example, exposure to maize import is very high.

Let's see the association's figures!

• The feed maize grown in Hungary doesn't meet domestic demand.
• With last year's maize harvest of 2.8 million tonnes, we need to import at least 1.9 million tonnes of maize before harvest.
• From 1 October to mid-April, 1.2 million tonnes of maize were imported from Ukraine, so we would need to obtain the 700,000 tonnes of maize we are missing from other import sources.

Grain farmers say that by banning Ukrainian imports, we are losing the raw materials closest to us which are thus the most economical. The exclusion of Ukrainian goods will create a market disruption, of which Hungarian consumers will be the casualties. This measure will create serious difficulties for Hungarian feed producers and industrial processors, which will in turn have an impact on livestock farmers and consumers.