What drives the price of wheat, besides the war in Ukraine

The price of wheat plummeted from its peak after Russia invaded Ukraine, but experts say one of the world’s most consumed foods continues to be in short supply and warn that a global hunger crisis still looms.

Like oil, steel, beef and other commodities critical to the economy, wheat changes price and availability in response to a complex array of overlapping factors, such as geopolitics and weather. Although the drop in the price of wheat offers a respite for countries that are dependent on importing the crop, it can deter farmers from planting more.

Nor does the drop in prices address pre-existing problems aggravated by a war between two of the world’s largest producers. Energy prices remain high, affecting the cost of running farm equipment and transporting grain to market, as well as the cost of fertilizers. And hot, dry weather that limits yields is becoming more and more common.

“The fundamental picture hasn’t really changed,” said Ehsan Khoman, who manages emerging market and commodity research for Mitsubishi UFJ Financial Group, a Japanese bank. “There is a potential where food prices could spiral out of control.”

The Russian invasion of Ukraine caused soaring food and fuel prices as war and sanctions disrupted supplies to two of the world’s leading agricultural and energy exporters. The two countries together account for about a quarter of global grain exports, according to the United States Department of Agriculture.

Oil prices have fallen slightly since the start of the war, although it still costs much more than at the start of the year for Americans to fill their cars with gasoline, for Europeans to heat their homes with natural gas, and only for anyone, anywhere, to do something related to the cost of oil. Wheat prices, however, have dropped roughly to where they started the year.

The price of a widely traded type of wheat that started the year around $ 7.70 per bushel jumped to $ 13 just after the Russian invasion of Ukraine in late February, according to futures contracts traded in Chicago. a global hub for merchandise. The price remained mostly in the double digits until mid-June when it started to fall. On Monday, wheat was trading at just over $ 8 per bushel.

After the initial shock of the invasion, rising prices deterred some countries from buying wheat, reducing demand and weighing on prices. The increase in supply from winter wheat crops has also lowered prices in recent weeks.

An important factor that pushed down grain prices was the course of negotiations on the fate of more than 20 million tons of grain stuck in the Black Sea ports of Ukraine. A little over a week ago, an agreement was reached to open an export corridor to allow some of the war-trapped grain to move around the world. For the first time in more than five months, a ship loaded with grain left a port in Ukraine’s Odesa region on Monday.

The deal may not hold up amidst the fighting, and even if it does, experts say it probably won’t be enough to address other issues looming over the global grain market.

“This deal has been expanded as something that will be a solution to the world’s food shortage, and it just isn’t,” said Tracey Allen, agricultural commodity strategist at JPMorgan Chase.

Other factors more entrenched in the grain market, from energy and fertilizer prices to climate change, could play a more important role in determining the cost – and availability – of a loaf around the world.

Experts believe it is likely that wheat prices will rise again. The further uncertainty is that futures contracts work by allowing buyers and sellers to agree on a price for wheat that will be delivered in the future, typically three months. And a lot can change in three months.

“Prices will remain higher and consumers will feel it in the price of the products they buy on supermarket shelves,” Ms. Allen said.

Last year’s drought meant that even before Russia invaded Ukraine, global food markets were under pressure.

While some regions such as Argentina have experienced bumper harvests and Russia is expected to have a bountiful harvest this summer, the intense heat and low rainfall have affected the amount of wheat others could grow.

In Canada, temperatures hit new records. At the end of July 2021, about three-quarters of the country’s agricultural land was classified as abnormally dry. Canada’s grain production fell by nearly 40% from 2020 to 2021, causing its exports to Latin America and the Caribbean to drop by more than 3 million tons, according to the USDA.

The drop in global supply due to bad weather had already helped push up prices coming this year. In January 2020, wheat cost around 30% less than today.

Canadian wheat production is expected to increase over the next year. The spring harvest in the United States, led by North Dakota, is also expected to be robust. But Europe suffered a heatwave, which raised concerns about a weak yield, while India banned grain exports in May due to drought.

Experts warn that weather fluctuations are likely to become more pronounced, increasing uncertainty about global production and the direction of prices going forward.

Oil prices largely determine the cost of operating farm equipment and transporting the harvested grain. Natural gas prices are even more important to farmers because nitrogen, used to make fertilizers like ammonia and urea, is produced from natural gas.

“It’s not just about grain prices, it’s also about shipping costs and prices for fuel, fertilizer and so on,” said Luiz Eduardo Peixoto, an emerging market economist at BNP Paribas.

Russia, the largest fertilizer producer in the world, has consistently restricted the flow of natural gas to Europe, not only driving up fuel prices, but also pushing up the cost of nitrogen fertilizers. As fertilizer prices rise, wheat prices have also risen in the past week.

Because Russian fertilizer is so important to global agricultural trade, it has avoided international sanctions that have limited other Russian exports, giving Moscow political leverage on another crucial commodity the world needs.

Higher costs for fuel and fertilizer affect the profits farmers can make and create a dilemma for grain-producing nations. This is especially true of Ukraine, where transportation of grain to overseas buyers has become expensive due to the war, said Dan Basse, agricultural economist and president of AgResource, an analytics firm.

While high prices hurt countries that import grain, low prices could dissuade farmers from planting more this year, especially in Ukraine, which faces difficulties in selling their current crop, which could make them unable to afford. cultivate more.

Egypt and Indonesia are heavily dependent on Ukrainian wheat, and famine-stricken Somalia imports wheat mainly from Ukraine and Russia.

The USDA predicts that the 18.8 million tons of wheat Ukraine has exported over the past 12 months will drop to around 10 million over the next 12 months.

“Farmers cannot afford to plant the next crop,” said Mr. Basse. “We need world grain prices to rise so that farmers can expand planting in the next growing season.”

However, even if prices rise enough to encourage more planting, that may prove irrelevant when grain storage is overflowing as farmers struggle to move crops to conflict areas.

“It almost doesn’t matter how high the prices are,” said Ms. Allen of JPMorgan. “It does not solve the problem of removing wheat from farms.”

International agencies have issued repeated warnings about how altered business models after the war in Ukraine could keep prices for commodities such as wheat higher than usual. But some experts say the warnings are not heeded.

“The problems affecting the food markets have not been solved,” said Khoman of Mitsubishi UFJ Financial Group. “There is still a shortage”.

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