Wheat prices could explode if the Russia-Ukraine standoff evolves into war, says an analyst.
“If some kind of conflict starts, we’re telling clients we don’t know how high wheat would have to go,” said Dan Basse, president of AgResource Company.
His contacts in the grain industry tell him the United States government is mulling over economic sanctions against Russia if it invades Ukraine.
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“The sanctions I’m hearing about would involve banning all Russian agricultural trade,” said Basse.
That would be a huge market mover for wheat because Russia is the world’s leading exporter of the crop.
Ukraine is the third largest exporting nation, and there is a distinct possibility its sales program could also be severely disrupted by war.
AgResource estimate that the two Black Sea countries still have about 23 million tonnes of wheat to export between Feb. 1 and the end of June.
“If you took them out of the equation globally, there’s just not enough wheat around,” said Basse.
He said the world’s exporters have about 19 days worth of supplies, so it is already a bull market without losing Russia and/or Ukraine.
SovEcon analyst Andrey Sizov thinks the current politics-driven wheat rally is overdone, and prices will come under pressure if a deal is worked out between Russia and Ukraine’s allies.
“However, if something goes wrong and we see Russian troops on Ukraine’s territory, this week would be just a warm-up for bulls,” he said in a recent report.
“We could see a 10 to 20 percent increase in wheat prices easily as the market will be definitely concerned about what will happen to around 20 million tonnes of wheat, which should be exported from Russia and Ukraine during the rest of 2021-22.”
Global wheat prices increased by a modest US$1.40 per bushel during the Crimean conflict, but this is a completely different story.
Crimea, which was part of Ukraine until Russia occupied and annexed it in 2014, is a very small wheat export area compared to Ukraine. And Ukraine’s allies are threatening harsh sanctions against Russia this time around, he said.
The mounting tension is already having an impact on wheat prices and sales.
“Few people in the Black Sea that I talk to are even offering grains for sale anymore,” said Basse.
“They just don’t know if they’ll be executable.”
Buyers are asking Black Sea sellers to include optional origins in their contracts, but sellers are reluctant to do that because they don’t know how much it would cost to source product from Canada, the United States or Argentina.
A risk premium is being incorporated into contracts and that is creating volatility in wheat prices.
Helen Plant, senior analyst of cereals and oilseeds with the United Kingdom’s Agriculture and Horticulture Development Board, said in a recent market commentary that political events often have more impact on grain prices in the winter because there is less news about grain supply to move markets.
She agreed that tensions matter in this case due to the market clout of Russia and Ukraine.
“Further escalation of the tensions could disrupt grain exports from the region,” said Plant.
“(Tensions) could well continue to offer some support to old crop prices for some weeks yet.”
She said it could also bolster new crop prices because Russia and Ukraine are expected to have 23 percent of the carryout from the 2021-22 crop, which may not be accessible in the new crop year.
The conflict could also push up natural gas prices, resulting in even higher nitrogen fertilizer prices.
On the flipside, the tensions could drive up crude oil prices, creating a bigger market for ethanol and its corn and wheat feedstocks, said Plant.
Contact sean.pratt@producer.com
