War, Climate Change and Energy Costs: Wheat Market Turmoil

Wheat prices have fallen from their peak after Russia invaded Ukraine, but experts say there are still shortages of one of the world’s most widely consumed foods, and the global hunger crisis continues. I am warning you that it is coming.

Wheat prices and availability, like oil, steel, beef, and other commodities vital to the economy, vary according to a complex set of overlapping factors, including geopolitics and weather. Falling wheat prices are giving countries dependent on wheat imports some respite, but may deter farmers from planting more. Nor does the price drop address existing problems exacerbated by the war between the world’s two largest producers. Energy prices remain high, impacting the cost of running farm equipment, transporting wheat to market and the cost of fertilizer. And hot, dry weather that puts pressure on crop yields is becoming more common.

Ehsan Khoman, head of emerging markets and commodities research at Japanese bank Mitsubishi UFJ Financial Group, said: “Food prices can get out of control.”

The wheat market has crashed this year.

Russia’s invasion of Ukraine has sent food and fuel prices skyrocketing as war and sanctions disrupted supplies from two of the world’s major agricultural and energy exporters. Together they account for about a quarter of the world’s wheat exports.

Oil prices have come down a bit since the start of the war, but from Americans filling their cars with gas, Europeans heating their homes with natural gas, anyone can do anything related to the cost of oil. Wheat prices, however, have fallen to almost their levels at the beginning of the year.

The price of widely traded wheat, which started at about $7.70 a bushel, fell to 13 shortly after Russia’s invasion of Ukraine in late February, according to a futures contract trading in Chicago, a global wheat hub. The dollar jumped. Prices hovered in nearly double digits until they began to fall in mid-June. Wheat traded at just over $8 a bushel on Friday.

After the initial shock of the invasion, higher prices discouraged some countries from buying wheat, lowering demand and weighing on prices. Increased supply from the winter wheat harvest has also driven prices down in recent weeks.

A deal to free trapped grain offers only partial relief.

A key factor driving down wheat prices was progress in negotiations over the fate of more than 20 million tonnes of grain stuck in Ukraine’s Black Sea ports. About a week ago we reached an agreement to open an export corridor that would allow some of the grain trapped by the war to move around the world.

The deal may fall apart in the midst of fighting, and even if it does, it probably won’t be enough to address other issues at stake in the global wheat market, experts say.

“This deal is touted as the solution to global food shortages, but it’s not,” said Tracy Allen, agricultural strategist at JPMorgan Chase & Co.

Other factors entrenched in the wheat market, from energy and fertilizer prices to climate change, may play a bigger role in determining the cost and availability of bread around the world.

Experts believe wheat prices are likely to rise again. Adding further uncertainty, futures contracts allow the buyer and seller to agree on a price for wheat that will be delivered to him in the future, usually three months later. And a lot can change in 3 months.

“Prices will continue to rise and consumers will feel that in the prices of products they buy on supermarket shelves,” Allen said.

Climate change is making wheat harvests less predictable.

Last year’s drought meant that global food markets were under pressure even before Russia invaded Ukraine.

While some regions, such as Argentina, have seen good harvests and Russia is expected to have a large harvest this summer, intense heat and low rainfall have affected wheat production in other regions. rice field.

In Canada, temperatures have risen to record highs. By the end of July 2021, about three-quarters of the country’s agricultural land was classified as abnormally dry. Canada’s wheat production fell by nearly 40% from 2020 to 2021, while exports to Latin America and the Caribbean fell by more than 3 million tons, according to the USDA.

Reduced global supply due to bad weather has already pushed up prices earlier this year. In January 2020, wheat was about 30% cheaper than it is today.

Canadian wheat production is expected to recover over the next year. The US spring harvest is also expected to be strong, led by North Dakota. But Europe has been hit by a heatwave, fears of a decline in yields, and India banned wheat exports in May due to drought.

Experts warn that weather volatility is likely to become more pronounced, adding to uncertainty over future global production and price directions.

Energy prices matter to wheat farmers.

Oil prices primarily determine the operating costs of agricultural equipment and the transportation costs of harvested grain. The price of natural gas is even more important to farmers because the nitrogen used to produce fertilizers such as ammonia and urea is produced from natural gas.

“It’s not just grain prices, it’s transportation costs, fuel prices, fertilizer prices,” said Luis Eduardo Peixoto, emerging markets economist at BNP Paribas.

Russia, the world’s largest fertilizer producer, has steadily restricted the flow of natural gas to Europe, driving up fuel prices as well as the cost of nitrogen-based fertilizers. As has risen so has the price of wheat, rising over the past week.

Russia’s fertilizers are so important to global agricultural trade that it’s important to circumvent international sanctions that restrict other Russian exports and give Moscow political leverage over another vital commodity the world needs. There is

Low prices are not always good for wheat growers.

Rising fuel and fertilizer costs eat into the profits farmers can make and wreak havoc on wheat-producing countries. said to apply to

High prices will hurt wheat-importing countries, but low prices may discourage farmers from planting more crops this year. Ukraine, in particular, faces the challenge of marketing its current crop and may not be able to afford to grow more wheat.

Egypt and Indonesia rely heavily on Ukrainian wheat, while famine-stricken Somalia imports wheat mainly from Ukraine and Russia.

The USDA forecasts that Ukraine exported 18.8 million tons of wheat over the past 12 months, dropping to about 10 million tons over the next 12 months.

“Farmers can’t afford to plant the next crop,” Basse said. “Global wheat prices will need to rise for farmers to plant more in the coming growing season.”

But even if prices rise to encourage more planting, it turns out to be irrelevant when grain bins are overflowing because farmers struggle to move crops in conflict areas. There is likely to be.

“It hardly matters how high the price is,” said Allen of JPMorgan.

International organizations have repeatedly warned that changes in post-war trade patterns in Ukraine could keep prices of commodities such as wheat higher than usual. But some experts say warnings aren’t being heeded.

“The issues affecting the food market have not been resolved,” said Koman of Mitsubishi UFJ Financial Group.

[This article originally appeared in The New York Times.] War, Climate Change and Energy Costs: Wheat Market Turmoil

Back to top button