Russia has withdrawn from a deal allowing Ukrainian grain exports from Black Sea ports. No one should panic. The Chicago wheat futures benchmark rose 7 per cent to almost $9 a bushel. That is relatively high. But the figure is still well below the peak that followed Russia’s invasion of Ukraine in February.
The picture mirrors the hydrocarbons market. After eight months of war, supply uncertainties have come into sharper, narrower focus, reducing volatility. Wheat is plentiful, thanks to a good harvest. Getting it to where it is needed remains a problem.
Ukraine and Russia previously accounted for almost a third of global wheat exports. Ukraine may export just 6mn tonnes this year if it is lucky, one-third of what is typical, according to UBS estimates. Russia is also failing to get much of its crop to market. Many shippers are unwilling or unable to send vessels into harm’s way. Even so, a bumper global harvest pushed net speculative short positioning on US wheat futures to a two-year high last week, notes Saxo Bank.
That looks odd given supply concerns. Russia should export about 42mn tonnes of this year’s harvest. It has only managed to ship about 12mn tonnes so far, slightly below last year. Countries in Africa and the Middle East are reliant on these exports and are now paying steep premiums.
Weather is likely to return as a factor with the start of harvests in the southern hemisphere. This is subject to a third consecutive period of disruptive La Niña weather conditions. Rain is already causing flooding in Australia. A drought in Argentina means the harvest could be a quarter below normal.
US water shortages suggest winter wheat for harvest next year will suffer too. Russian and Ukrainian farmers may meanwhile plant less wheat next year if the war continues, impeding lucrative exports.
The sensitivity of agricultural commodities prices to multiple granular factors is hardly news to traders and food manufacturers, however. The Ukraine war has simply become one of these factors. Reflecting this, prices are only slightly higher than their prewar peak of $8.4 a bushel.
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