Bread may be the first thing to go missing from our tables as Putin wages war on Ukraine

Russia and Ukraine are two of the world’s top wheat exporters. So when Russian forces invaded Ukraine on Thursday, global grain supply was put in jeopardy, and the price of wheat jumped to its highest levels since 2012.

Wheat markets surged by the maximum amount allowed by the Chicago exchange on Thursday, trading 5.7% higher at $9.3475 a bushel at 8:26 a.m. in London on Thursday, while in Paris, milling wheat is being traded 16% higher. Oilseed and soybeans also had a broad rally on the back of escalating tensions. 

Russia’s invasion of Ukraine could affect the 59 million metric tons (mmt) of wheat Russia and Ukraine export each season around the world. Ukraine alone exports 24 mmt of wheat, which is primarily grown and milled in the country’s southeast, in close proximity to the Donetsk and Luhansk regions, to which Russia has already deployed troops.  

If anything happens to those exports, whether through warfare or sanctions, the impact will be severe.

“The price impact of the withdrawal of such amount of wheat would be extraordinary, especially because the demand for human consumption of wheat is very inelastic,” said Carlos Mera, senior commodity analyst at RaboResearch, in a Linkedin post in January laying out the magnitude of a then-theoretical invasion.

Mera noted that the Chicago Board of Trade price of wheat went up by 21% in 2021 after a decade of low crop output ran the global deficit of wheat up to 8.8 mmt, according to the USDA. He then noted that compared with that regular market shortage, a crisis in Ukraine would put six times the amount of wheat in jeopardy. If that wheat was taken off the market, he estimated that prices could double, and countries in the Middle East and northern Africa, major importers of Russian and Ukrainian wheat, would deal with severe shortages.

Enter China

No sanctions have been placed on the global wheat markets yet, and it is unclear what shape they will take. But China is using this time as an opportunity to strengthen its bilateral ties with Russia through the grain market. 

China’s General Administration of Customs announced on Thursday it is open to importing wheat from all regions of Russia, giving Putin an alternative to Western markets that might be closed under possible sanctions. 

China previously shut out Russia for wheat imports owing to concerns over possible fungus and other contamination.

According to a Rabobank research note, if there is a war and the West puts sanctions on Russia’s wheat supply, the price of grain will depend entirely on a trade deal with China. If China can buy the massive volumes of wheat it needs almost exclusively from Russia and Ukraine, global buyers could buy from origins previously serving China’s needs.

Possible sanctions

Russia’s outsize impact on wheat prices and its role as a “commodity superstore” raises the risk that the crisis will “exacerbate the current global inflationary dynamics,” said Helima Croft, global head of commodity strategy at RBC Capital Markets, in a note to clients. Russia and Ukraine together produce around 29% of the global export of wheat. 

Global food prices are already at a 10-year high, according to the UN’s Food and Agriculture Organization, and the Western world will now have to balance taking strong action against Russia with the likelihood that this will send wheat prices rocketing higher.

The tensions in the region are going to bring volatility in export prices in the coming weeks, according to reports by S&P Global Platts, with traders noting demand for Australian and Argentinian wheat was likely to increase as the conflict gets worse. 

What wheat sanctions look like against Russia remain unclear, but according to Mera in the LinkedIn note, “the impact of an embargo on Russian wheat would be so large, that any sanctions are likely to allow for an exception for wheat exports.”

While unlikely, Mera adds, “Stranger things have happened.”

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