If you believe the news reports, a Russian invasion of Ukraine is imminent. In any case, political tension flares up again. This is also being felt in the grain market. Especially after Egypt decided to throw oil on the market fire.
The mainstream media is divided over the political situation between Ukraine and Russia. While some say a raid could take place this week, others believe it won't happen that quickly. This belief had also crept into the grain market. Yet the fire is burning again, despite the fact that politics is being pursued at a high level by the US and various European countries together with Russia. At the same time, the US says that an invasion could take place at any time.
Much to lose
Adding fuel to the wheat fire is a news report from the Egyptian state media agency MENA. In a conversation with the minister of raw materials, he announced that the country will drastically revise its wheat purchasing policy. Egypt is the largest net importer of wheat in the world. Of this, 50% comes from Russia and 30% from Ukraine. So the country has a lot to lose if an invasion becomes a reality.
The purchasing policy is already on the rack due to the high wheat prices this season. Two-thirds of the population uses the Egyptian bread subsidy. That costs the government $5,5 billion annually. Increased wheat prices have increased the budget for this season by $763 million. The country is trying to grow more wheat itself (which could reduce imports to 5,3 million tons), but that is far from sufficient. Moreover, drought is playing an increasingly important role this season.
Enough supplies
According to Minister Ali Moselhy, the country has enough wheat in stock to feed the population for more than five months. It takes into account that in the event of an invasion, the export of wheat from the Black Sea region will be hindered. In the meantime, he informed the news agency that the Ministry of Finance is investigating the possibilities to better cover (price) risks.
Another form of risk management that is already being applied is doing business with more countries. For example, Latvia was recently accredited as a supplier of wheat. Egypt has always been a major buyer of French wheat, but Russia has largely taken over the market by adjusting quality requirements.
Financial settlement
The financial side of wheat imports is also being tinkered with. For example, the Central Bank of Egypt announced today (February 14) that importers will be required to obtain a 'letter of credit' (creditworthiness statement issued by a bank) from March 1. The importing party must have access to 110% of the cash value. This will replace the current CAD method (Cash against Documents). The bank operates as an independent intermediary and assesses the purchase contract and manages the money from buyer to seller.
What does all of the above mean for the wheat market? The wheat contract on the Matif already rose considerably on Friday, after a dip on Thursday. An additional €7,25 per tonne was added. This closed the March contract at €268,75. The CBoT also ended higher at $291,31 per tonne.
Volatile week
That increase continued on Monday in both Paris and Chicago. On the Matif, the March contract is trading at €272. A plus of €3,25. The September contract stands at €258 on Monday afternoon. The CBoT also opened higher before diving sharply lower. On Monday afternoon, the March contract is down $8. Stock traders and analysts are anticipating a volatile week on the wheat market due to rising political tensions.