For wheat, in particular, the mounting political tensions between Russia and Ukraine are a ticking time bomb. The market reacts cautiously. If the situation escalates, a sudden change of course is possible. This has far-reaching consequences and not just for wheat.
The wheat markets in Chicago and Paris have had a week of recovery after the release of new figures by the American Agriculture Department (USDA). His Wasde report noted a larger global wheat harvest expected. In addition, there are other factors that play a role, such as disappointing exports. Incidentally, that from the US was considerably better last week.
Sanctions hit grain
Just before and certainly after last weekend, all eyes are focused on the situation in the far east of Europe. Talks between Russia and the US stalled, although both sides indicated that they wanted to keep the dialogue open. It became clear that President Biden - together with the European Union - will use heavy economic sanctions as a means of pressure if Russia decides to invade Ukraine. The consequences of these sanctions may be very serious for the grain market.
Russia has become the largest exporter of wheat in the world in recent years. A fifth of all wheat is grown in that country. The US sanctions mentioned do not specifically mention wheat or the agricultural sector in general. But when international financial transactions are thwarted, this has irrevocable consequences. For example, excluding Russia from the Swift international trading system for financial transactions. Damage to the grain market is 'collateral damage'.
Lesson from the past
It makes the international market a bit nervous. The events following the annexation of Crimea in 2014 are still relatively fresh in our minds. Wheat prices then rose from around €190/$200 per tonne to more than €220 per tonne. In the US, the price even rose towards $270 per tonne. An increase from 15% to 35%. However, the final export of wheat from Russia and Ukraine in that year was not negatively affected.
Once again, a sudden price increase is taken into account if the situation continues to develop negatively. The market is - especially in Europe and the Black Sea region - in a quiet period in terms of growing season. All the focus of the market is therefore on the political level. At least that is the sentiment at the moment.
Price above €300?
A wheat price of €220 per tonne is not particularly high in light of the current market. However, if we calculate a price increase of 15%, this means a price of €316,25 per tonne. This offers opportunities for arable farmers who still have wheat to sell. At the same time, it is a major risk for livestock farmers who are dependent on the raw material.
Not only wheat is affected by a possible escalation. Besides wheat, corn is the raw material that can react the most. Not only because the price of wheat is rising, but also because the energy market can be influenced. Corn is an important raw material for biofuel (ethanol). That is also a determining factor.
Consequences for fertilizer
An even greater danger is the price of natural gas. Europe is very dependent on Russian gas. Between 40% and 50% of total gas imports come from Russia. The new Nord Stream 2 pipeline is not yet operational and it is precisely this supply that is being targeted by the Americans. Higher gas prices inevitably mean higher fertilizer prices, mainly for nitrogen. That is a risk for all agricultural entrepreneurs.
The Matif increased for wheat on Monday afternoon, January 24, by another €3 to €275,50 per tonne. The March contract for grain corn in Paris also recorded a similar increase. In the US, the CBoT also turns green.
Sufficient wheat
How the situation will ultimately play out is almost impossible to say. Much depends on the discussions between all stakeholders. The grain market follows them closely. If we look at the hard figures, there is no reason for great concern. Ukraine has now exported three quarters of its wheat and still has ample supplies. According to USDA figures, Russia can still export about 20 million tons of wheat this season. Availability is therefore not an issue, but how it is priced remains to be seen.
Both countries are expected to retain more of their own grain harvest to anticipate possible shortages and rising food inflation. The ending stock is estimated to grow by even 23%. That is on top of the more than 20% of last season. Meanwhile, export firms have less and less grain in stock. Worldwide this amounts to 53 million tons compared to 60 million tons a year earlier. This also means there is a risk in the 2022-2023 wheat harvest.
Read also: What if Putin takes the European breadbasket? An analysis and interview with Dutch entrepreneur Kees Huizinga in Ukraine.