Fears of the impact of the Russia-Ukraine war on global inflation and recession have escalated in recent weeks. Another major issue looming over the horizon is that the conflict could result in a hunger crisis as both countries account for over a quarter of the world’s wheat exports.
Wheat prices recently surged to a 14-year high, with the price of a bushel of wheat soaring more than 50% to $12.94 on Monday since the Russian invasion of Ukraine began. The price movement on Monday hit the Chicago Board of Trade’s limit for another day.
Reliance on Russia and Ukraine Wheat Exports
Russia and Ukraine are two of the world’s largest wheat exporters, accounting for about 30% of the global total. In 2019, Russia was the world’s top wheat exporter, while Ukraine came in fifth next to the US, Canada, and France, according to the Observatory of Economic Complexity.
The disruption in both countries’ grain harvest and trade could have catastrophic impacts on their biggest buyers in the Middle East, including Egypt, which depends on Ukraine’s wheat imports to produce subsidized bread to its poor population and other staples.
These fears intensified on Wednesday after the Ukrainian government said it would ban exports of vital agricultural goods like wheat, corn, salt, meat, and oilseeds to maintain market stability in Ukraine and “meet the needs of the population in critical food products.
Looming Food Shortage
Many nations rely on Ukraine and Russia for grain and oilseeds, and the crisis could exacerbate the supply of food, especially when low-income countries are still reeling from the COVID-19 pandemic.
Some economists had warned that the war could lead to a repeat of the Arab Spring in the past decade when social unrest and armed rebellions led to soaring food prices. David Beasley, the head of the United Nations World Food Program, said,
"The fallout from Ukraine will spread across the globe. Russia and Ukraine together export 30% of the world's wheat. As this war heats up, many countries will face: soaring food prices, catastrophic hunger & growing instability.”
As the war intensifies, farmers in Russia and Ukraine are tipped to reduce their planting area in the coming seasons, placing pressure on other exporters to boost production. China, India, US work to fill in the gap.
Although Russia and Ukraine’s grain trade has not been technically included in sanctions imposed by Western countries, many importers have turned to other sources like China, India, and the US to make up for any shortfalls over fears of supply disruptions, according to ING Bank.
ING’s head of commodities strategy, Warren Patterson, said in a note on Monday,
“We would expect to see strong plantings from US farmers over the spring, leaving the potential for an increase in US spring wheat, corn, and soybean area.”
Volatility in Wheat Markets
The lingering crisis in Ukraine has caused wheat prices to be highly volatile in recent weeks as countries work to ensure grain imports feed their population. The CBOT soft red winter wheat, KC Hard Red Winter Wheat, and MGEX spring wheat all reached their daily trading limits for another day on Tuesday, while US wheat futures snapped a six-day winning streak the same day.
Investors have been hesitant in making big position moves for the second week in a row last week despite the market volatility, Reuters said.
In the week ended March 1, commodity funds axed only 11,000 futures and options contracts from their CBOT wheat net short, down from estimates, the news outlet reported earlier this week, citing data from the US Commodity Futures Trading Commission.
CHS Hedging was quoted by Bloomberg News as saying,
"Huge speculative interest has flowed into wheat that may have pushed futures past reasonable levels. The export market is difficult to define with many countries banning exports and tenders being canceled.”