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It’s not just energy: The Ukraine conflict is sending wheat prices soaring, pounding poor countries hardest

March 24, 2022, 8:00 PM UTC

In Indonesia, packets of the beloved, bestselling Indomie brand of instant noodles have vanished from the shelves of sundry grocery stores. In Egypt, the jump in the state aid required to make the traditional flatbread eish baladi affordable for the poor is sorely straining Cairo’s super-stretched resources. In Turkey, cash-strapped shoppers form long lines to buy cheap, government-issued bread, loaves they can’t afford in their neighborhood souks or bazaars. What these countries share is a severe disruption in the gigantic wheat shipments they depend on so heavily to feed their people, caused by Russia’s invasion of Ukraine.

Most years, the two warring nations combined furnish around 80% of all wheat imports to Turkey and Egypt, and Ukraine ships over one-fifth of Indonesia’s deliveries from abroad. And for families in the Mideast and North Africa, wheat is the staple of staples, accounting for one-quarter of the calories they consume, twice the share in the U.S. and Europe. “Nations in those regions are scrambling to find supplies and are paying much, much higher prices for that wheat,” says Joseph Glauber of the International Food Policy Research Institute, former chief economist for the U.S. Department of Agriculture. “Their governments remember the lessons of the Arab Spring, when food price hikes were the spark that caused rioting and overthrew the regime in Egypt. They will do everything possible to hold prices down, but it will be a blow to their finances.”

The squeeze from Russia and Ukraine has tightened the worldwide market so severely that when Egypt scoured the globe for wheat supplies during the first two weeks of the war, its tender didn’t attract a single supplier. Cairo has just introduced a new program to lower the need for pricey imports by purchasing locally grown supplies from the nation’s farmers. It’s requiring cultivators to sell a large part of their output to the state program that makes wheat into flour for subsidized bread. The carrot: The farmers will get much higher prices than what they would receive from private bakeries. Hence, the extra costs will further strain the national budget.

The war’s assault on global grain supplies has already brought a number of nearby nations to the brink of crisis. Countries such as Yemen and Lebanon “are already on their knees in terms of hunger,” says Arif Husain, chief economist for the World Food Program. “Many of these populations…are a step away from famine.”

Today, wheat prices stand at their highest levels in the past half-century, excluding a brief spike in 2008. The conflict is also significantly swelling food prices in the U.S. and Europe, adding to inflation that’s already running at 40-year highs. “We’re getting these big increases in wheat and corn on top of the surge in energy prices, which are a bigger factor in overall food costs than agricultural commodities due to role of oil in transportation and natural gas in manufacturing,” observes Sal Gilbertie, CEO of Teucrium Trading, a provider of commodity ETFs. In the month of February, the U.S. consumer price index for bakery products such as bread, cookies, and crackers rose at an annual rate of almost 16%, one of the highest readings of any category.

The upheaval will prove a boon to the producers poised to fill the huge void created by the shrinkage in exports from Ukraine and Russia. The top beneficiaries should be the U.S., Australia, Canada, and France, Europe’s biggest producer by far. They will profit from a rare double: prices far above the norm of the past few years and a sharp increase in volumes. The old shipping patterns will shift radically. Supplies that once made the relatively short trips across the Black and Mediterranean seas from Ukraine and Russia to Turkey, Egypt, and Yemen will now cross the Atlantic, raising costs even more for the poorest purchaser-nations.

The waiting windfall from planting and harvesting across more hectares of wheat will trigger large increases in production outside Russia and Ukraine, weather permitting, of course. “High prices will motivate every farmer on the planet to plant and harvest record amounts of grain,” says Gilbertie.

The problem, says Gilbertie: The hole created by the shutdowns in Ukraine and Russia is so gigantic that even with added output from other nations, prices will remain elevated until a big share of those lost supplies returns. It’s the same story for a host of agricultural commodities, including corn and sunflower oil, where the two nations together ship one-fifth and one-half of the world’s supplies, respectively. In the past, the major unpredictable factor in wheat production has always been the weather. But the Ukraine-Russia shutdown is the equivalent of a series of crippling droughts hitting most of the world’s big producing regions in a global storm. The conflict has introduced a new layer of uncertainty clouding the wheat market’s future trajectory. Questions such as whether Ukrainian farmers can plant their winter wheat this fall and harvest the crop in the summer of 2023 will have a major impact on world supply and prices. That’s especially true because in the absence of regime change, Russia’s exports––which are even bigger than Ukraine’s––are likely to remain at least partially blocked by sanctions, perhaps for years to come.

For now, it looks like market prices are expecting a return of at least a large portion of Ukrainian supplies by next year. But if that doesn’t happen, says Gilbertie, the commodities’ hit from the savage war that’s doing so much to boost worldwide inflation and punish the world’s neediest populations could last into 2023 and 2024.

The war is blocking Ukraine’s main ports

Ukraine chiefly ships wheat and other crops from ports on the Black Sea, including Odessa, Mykolayiv, and Chornomorsk. Those cities sit near one of Russia’s principal targets for conquer, the southeastern coast adjoining Crimea. For a month, the Russians have been laying siege to Mariupol to the east of the port cities. According to BayWa, Germany’s largest agricultural trader, no grain shipments are currently departing Ukraine. BayWa also reports that the Russian Navy is blocking Ukrainian shipments from leaving the Black Sea. Russian warships attacked three Panama-flagged vessels laden with Ukrainian grain, damaging two and sinking one, though causing no casualties, charges the Panamanian Maritime Authority.

Russia is also hijacking cargoes, according to the Ukraine government. The governor of the region that includes Berdyansk accused the the invaders’ navy of using tugboats to tow five ships fully or partly loaded with grain from the Ukrainian export hub to the Sea of Azoz in Russia.

As for Russia, its wheat exports in March surprisingly matched its normal pace of around 2.2 million tons. But it’s likely that shipments will drop sharply from here. Russia has suspended all cargoes to four former Soviet republics, including Belarus and Kazakhstan, until June 30, in part to preserve supplies for its own population. In late March, the head of Russia’s grain exporters’ union stated that new contract signings were “negligible” and that “the operational risks associated with delivery and payment of grain is quite high.” It’s unclear if Egypt will honor its existing contracts with Russia, but it’s already seeking new supplies from Romania and Bulgaria.

Supplies were tight before the war began

Glauber notes that the world’s grain stocks were already low before Russian tanks rolled into Ukraine on Feb. 24. A drought across the plains of both the U.S. and Canada reduced the summer harvest last year. Dry weather in the Mideast curbed local production in Egypt and other big import markets, and China bought far more wheat than in past years, in part as extra feed for livestock. “For the last two years, the world consumed more wheat than it produced,” says Gilbertie. The relatively low production, coupled with the usual hunger from the Mideast and North Africa, pushed inventories to their lowest levels in years. As a result, prices jumped. From 2016 to the spring of last year, prices hovered in the $4 to $6 per bushel range. But from mid-April of 2021 to mid-February of 2022, spot prices rose around 30% from roughly $6.50 to $8.50. Then the invasion uncorked a moonshot to $13 in early March, followed by a stabilization in today’s $11 range.

“It was a perfect storm of already low stocks and the war that sent prices soaring,” says Nick Paulson, a professor of agricultural economics at the University of Illinois.

The extraordinary size of Russia and Ukraine in the world wheat market

Russia supplied an average of 19.3% of the world’s wheat market between 2017 and 2021, according to UN statistics, and Ukraine ranked fifth behind the U.S., Canada, and France at 9.9%. In recent years, Russia has been sending one-third of its wheat deliveries to Egypt, just under 20% to Turkey, and significant but lesser shares to Bangladesh, Nigeria, and Yemen. For Ukraine, the big markets also encompass Egypt (45%) and Turkey (7%), but unlike Russia, it’s won a huge customer in Indonesia, the destination for one-fifth of its wheat shipments abroad. By the way, Ukraine’s also a giant in global corn production, where Russia’s a puny player, projected this year to shipping 16% of the world’s corn exports. And for sunflower oil, the two nations together evenly divide no less than half the export market; each is more than four times larger than the No. 3 contender, Argentina.

Ukraine’s farmers grow almost exclusively winter wheat, crops planted in the fall and harvested in the summer, as opposed to spring wheat sown in early spring for picking in late summer or early autumn. Ukraine harvested a bumper crop in the summer of 2021 of 40 million tons, enough to satisfy far more than the 10% usual share of worldwide export needs. But by the time of the invasion, it had only exported less than half of those supplies. “The wheat is trapped in Ukraine, and before the war, the world market expected all those supplies to be exported,” says Gilbertie. “That was a big factor in the rise in price.”

Why future prices and supplies are so uncertain

Gilbertie notes that Ukraine fully planted its crop of winter wheat in the fall for harvest in the summer of 2022. “The big question is whether that wheat will be harvested at all,” he says. “Then, Ukraine would normally plant another huge crop in the autumn of this year to go on the market in the summer of 2023. But will that happen? It’s these questions that are making the markets so volatile, and the future price so uncertain.” He also notes that winter wheat needs to be fertilized in the spring for optimal yield, and no one knows if farmers can obtain sufficient fertilizer––this spring or next––or how effectively they’ll use what they can obtain, if they manage to harvest this year’s or next year’s crop at all.

For Gilbertie, Russia will have major problems exporting, even if it keeps some of its contracts with big traditional customers. “Where will Russia get the tractor parts it needs when industrial imports are blocked by sanction?” he says. “Russia is a huge fertilizer producer, but those plants would be hurt if they can’t get the right parts.”

The market already believes that Ukraine won’t harvest this summer, says Gilbertie, and that conviction is reflected in the current high spot price. The mystery is what happens to next year’s crop that must be sown in fall of this year. It will take six to eight months to estimate world supplies for 2023, says Gilbertie. That’s because we still have no idea if Ukraine will plant next year’s winter wheat, and how much export business Russia will lose. “In the meantime,” he says, “the market will remain in turmoil.”

Traders and principals are handicapping a strong possibility that a lot of the lost supplies will return fairly quickly. The futures price for delivery in September 2023 is $8.65, $2 below the current spot price, but well above the number before the conflict erupted. The July 2024 contracts now fetch around $9, again, well below today’s spot price.

But the market has seldom faced a wider gulf between two or more possible outcomes. For Gilbertie, an extended conflict in which Ukraine misses the fall planting could keep prices elevated well above historic norms for a couple more years. The pain will be intense for some of the world’s poorest nations that rely on Ukraine and Russia as their breadbasket. From San Diego to the U.K.’s Birmingham to Munich, this tragic conflict is delivering a jolt to folks filling their tanks. It’s now pounding them again––as the tab keeps mounting at the grocery checkout counter.

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