Russo-Ukraine war threatens wheat supply, shocks prices

Wheat stocks were already running low and prices were at their highest due to two years of inclement weather, when Russia’s attack jammed Black Sea trade and put nearly a third of the world’s exports at risk. The invasion prompted fears of food shortages in countries fed with imported grain and pushed prices to new highs.

The most traded US futures contracts for wheat milled in Paris and soft red winter wheat delivered in Chicago hit record prices at the start of the week. Then they fell. Chicago futures fell 8.5% at the end of the week, their worst weekly performance since 2014 when wheat was falling below a drought-induced spike. Along with the French markets, on-the-spot trading in St. Louis and Kansas City follows a similar arc.

Still, the benchmark US price, at $11.07 per bushel, is up 72% from a year ago and analysts expect the war to keep wheat high. Germany’s Commerzbank AG on Friday raised its spring-quarter price forecast for Chicago futures by 19% and Paris by about 14%.

Rising wheat points to further inflation in food prices and another force blunting the post-pandemic economic recovery. According to the Food and Agriculture Organization of the United Nations, global food prices hit an all-time high in February. According to the Bureau of Labor Statistics, US food prices in February were up 7.9% from a year earlier, a major loss from Americans’ purchasing power.

Analysts and traders do not yet know the extent to which global wheat supplies will be affected by the war. Last year’s crop residues have been kept off the market due to the closure of Ukrainian ports and the hesitation to enter a war zone to fetch Russian wheat. Meanwhile, it is unclear whether growers in the region will be able to harvest winter wheat, which was planted in autumn, or plant spring crops in the coming weeks.

“Russian ports are operating normally, but no one is willing to pay the exorbitantly high insurance costs to book cargo from there,” said Will Osnato, senior research analyst at Grow Intelligence, an agricultural data firm.

Since wheat is priced in dollars, exporters to Russia, where the currency has fallen by nearly 40% in 2022, can take cues from South American producers, who in previous years held onto the grain to stave off their own currency devaluations.

“It is the fog of war,” said Dave Whitcomb, head of research at Peak Trading Research, Switzerland. “We don’t know yet.”

The uncertainty prompted a frenzy of speculation that increased the volatility in prices. Investors poured so much money into the Teucrium Wheat Fund that it ran out of shares to sell on Monday. On the last trading day, March 4, the exchange-traded fund issued approximately 16 million new shares, up from the 13 million or more that were outstanding before the invasion. US financial regulators on Wednesday allowed the fund to create and sell additional shares.

The fund’s assets under management rose from $86 million before Russia’s attack to nearly $500 million, but fell to nearly $341 million by the end of the week as the price of wheat futures shed.

“In six weeks they will start planting in Ukraine and Russia,” said Sal Gilberti, president of Tukrim Trading LLC, which manages the Wheat Fund. “If it is disrupted it means a future shortfall in the supply that the world is counting on.”

The US Department of Agriculture on Wednesday lowered its expectations for Russian and Ukrainian wheat exports during the current marketing year, which began in June, by about 12%. The Department of Agriculture said in its monthly market forecast that some of the lost supply will be replaced by exports from Australia, where record harvests are expected, and India, which is increasing shipments overseas amid a string of bumper crops.

The U.S. Department of Agriculture expects US farmers to sow slightly more wheat than last year, when the fewest acres were sown in more than a century. Low yields are expected due to persistent drought in the western and northern plains.

Analysts and traders say that while US consumers can expect more sticker shock at the grocery store, the loss of Black Sea exports threatens some countries that rely on imports, unable to meet their grain needs. Huh.

Egypt, the world’s largest importer of wheat, recently canceled a tender after it received limited-price offers. Turkey reduced the order size. Tanzania recently said that its wheat import bill jumped 50% for the 12 months through January, before the Russian attack hit the market.

“The poorest people in the world will suffer from this war,” Mr Gilberti said. “It is a crime against humanity.”