Russia-Ukraine tensions drive global wheat prices higher

Photo: Mint
Photo: Mint

Summary

  • The two nations account for just under a third of global wheat exports, much of which goes to the Middle East to keep bread prices affordable

The threat of war between Russia and Ukraine is rattling international grain markets, driving wheat prices higher on both sides of the Atlantic and leaving traders girding for more volatility ahead.

The two nations combined account for 29% of global wheat exports, according to data from the U.S. Agriculture Department. The nearby Black Sea serves as a major conduit for international grain shipments and Ukraine is also among the top exporters of barley, corn and rapeseed.

The mounting tensions and growing militarization along the Russia-Ukraine border have helped drive wheat futures traded in Chicago up over 7% over the past two weeks to nearly $8 a bushel Monday—which is just below a nearly decade high of $8.50 a bushel reached last year. Benchmark European wheat futures, which are traded in Paris, have gained almost 6% over the same period to €278, equivalent to $310, a metric ton and near last year’s highs.

Some analysts worry a deep Russian push into Ukraine and Western sanctions that curtail Russian exports would be a worst-case scenario and could deprive global markets of the lion’s share of both nations’ wheat supplies.

“That is a huge quantity and it means prices could easily double," said Carlos Mera, head of agricultural commodities research at Rabobank.

Even a limited conflict that doesn’t stray far from the Ukrainian-Russian border and only causes minor damage to Ukraine’s agricultural infrastructure could drive prices up between 10% and 20%, said Andrey Sizov, managing director of SovEcon, a Russian research firm focused on Black Sea grains markets.

Ukraine is renowned as the breadbasket of Europe, thanks in part to its nutrient-rich “black earth" soils. But its key wheat growing regions and ports lie in Ukraine’s south and east, putting them close to Russian-held territory, analysts said. Ukraine’s Kharkiv Oblast, which borders both Russia and the separatist-held regions of Luhansk and Donetsk, is Ukraine’s most productive wheat region, according to data from the USDA.

Ukraine’s bountiful wheat exports have found willing buyers in North African nations who often depend on imports to keep their populations fed and bread prices down. Ukraine and Russia are major suppliers to Egypt, the world’s largest wheat importer. Middle Eastern buyers benefit from the short sea route via the Bosporus and would have to pay more in shipping costs to bring wheat from the U.S. or Australia.

Higher prices would come at a challenging time for countries that rely on wheat imports. Lingering supply challenges from the Covid-19 pandemic have helped push global food prices to decade highs. The United Nations’ Food and Agriculture Organization Food Price Index is hovering close to its highest level since 2011.

Another concern is what happens to Ukrainian and Russian ports on the Black Sea, which are the key gateways for grain exports. If there is damage to port infrastructure or disruption to shipments “then you’ll have a real problem," said Monika Tothova, an economist at the FAO. Such disruptions could have long-lasting impacts that could stretch into future crop seasons.

U.S. traders expect disruption in Eastern Europe could create opportunities to expand their share of the export market, said Brian Hoops, president of Springfield, Mo.-based Midwest Market Solutions Inc. Other major wheat growers, such as France or Australia, are also poised to swoop in if Russian or Ukrainian shipments dry up, analysts said.

When Russia annexed Crimea in 2014, concerns about the disruption of supplies from the Black Sea breadbasket drove wheat prices up around 25% in two months. When little disruption occurred, prices reversed course.

“Sometimes waiting for the spanking is worse than the actual spanking," said Jason Britt, head of Kansas City, Mo., brokerage Central States Commodities Inc. “The market’s anticipation could be worse than what actually happens."

Also balancing the supply risks that have pushed prices higher: the currencies of both countries have declined. That encourages farmers to export their crops to international markets where they can make more money selling in dollars, said Rabobank’s Mr. Mera.

For now, wheat prices are expected to remain volatile as tensions linger and diplomatic efforts to resolve the conflict continue.

“We think the risks are declining. It looks more and more like a diplomatic war, not a ‘hot’ war, and that is good for all parties involved," said Mr. Sizov at SovEcon.

Write to Will Horner at william.horner@wsj.com and Kirk Maltais at kirk.maltais@wsj.com

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