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Wheat prices soar as Russia invades Ukraine



With prices up 5.6% following Putin’s assault on the Ukraine, what’s the outlook for wheat prices?

IG Analyst | Publication date: Friday 25 February 2022 04:16

The European price of wheat has hit a 10-year high following Russia’s invasion of the Ukraine. Russian president Vladimir Putin ordered a full-scale assault on the country and, at 5am Ukrainian time, explosions took place near major cities, including Kyiv, the capital. Ukrainian President Volodymyr Zelenskyy declared martial law.

With concerns about the likelihood of disruption to food exports due to the conflict in Eastern Europe, wheat prices rose 5.6% to $935 a bushel, exceeding previous highs seen in November and building on the previous day’s highs.

Ukraine the ‘breadbasket of Europe’

Russia is the world’s second largest exporter of wheat, while the Ukraine is the fourth biggest. Together, the two nations provide 23% of the world’s wheat exports, according to data from the US Department of Agriculture, and produce over 95m tonnes a year. Indeed, the Ukraine is dubbed the ‘breadbasket of Europe’ because of its agriculture.

Prior to the conflict, wheat prices were already at high levels. Prices rose 30% last year alone and, according to the UN Food and Agriculture Organisation, “uncertainty over exportable supplies” could cause further price inflation.

Analysts at ING previously said earlier this month that the commodity markets were “starting to price in some geopolitical risk around the growing tension between Russia and Ukraine” despite the fact that there had been “plenty of uncertainty” over what would happen next.

With Marioupol and Odessa “unusable” due to the Russian bombing, Black Sea exports were suspended, French agricultural consultancy Agritel notes. "It is totally unprecedented," said Sebastien Poncelet, an analyst at Agritel. "When we see that there are explosions in Odessa, which is the main Ukrainian port, we must assume there will not be much grain loaded there today," he told AFP.

Previously, when the Russians annexed the Crimea in 2014, wheat prices rose 15-10%. However, at that time disruption to agriculture was limited, Poncelet points out. "The fighting was essentially confined to Donbas, which is not a big agricultural region, and the crisis remained focused on Crimea," he said.

Carlos Mera, head of agri-commodity markets at Rabobank, told The Grocer, that if the Ukraine’s Black Sea ports were blockaded or Ukrainian output was reduced, wheat prices could rise by anything from 10% to 30%.

Further sanctions by the Western governments could also push wheat prices higher, although it is unclear what action they may yet take. The UK grows 80% of its wheat and imports the remaining 20% from Europe.

The effect of rising gas prices

With Russia also providing a third of Europe’s gas, any disruption to supply or further hike in prices could also have a knock-on effect on the wheat price outlook. Natural gas is used to make fertiliser, which is then used to produce wheat and fertiliser costs are already rising, affecting the cost of wheat production. Brent crude, which is also used to make fertiliser, is at a seven-year high, exceeding $100 a barrel.

While the conflict in the Ukraine continues to escalate, wheat prices look likely to continue to climb.

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