Peace talks between Russia and Ukraine have had a dramatic effect on the wheat market this week, causing CBOT wheat futures to plunge by the maximum daily level allowed on Tuesday. The decline, however, has only made a small dent in the rally in wheat prices being fuelled by the war in Ukraine. Russia and Ukraine make up close to a quarter of the total global wheat exports with Russia holding the top exporting spot (or vying for it with the US) and Ukraine being the fifth largest exporter.
WisdomTree Wheat ETC prices notched lower after the talks but are still trading about 36% higher year-to-date, far above the level before the war in Ukraine.
False promise
The Russo-Ukrainian talks being held in Turkey are making for headlines full of promise, but it is too early to assume that this means an end to fighting. Russia only committed to reduce military action in two regions and within a day of the “ceasefire agreement” fighting in Ukraine continued.
Even if the conflict stopped immediately some of the damage done is already irreversible. According to the World Bank, some Ukrainian fields have been devastated during the fighting and with the transport routes completely disrupted, farmers are having difficulty getting hold of seeds and fertilizers for the next round of sowing.Ukraine plants two crops per year, one in the autumn and one in spring. The autumn crop was nearly all planted and had covered an area of around 6.5 million hectares and additional planting was taking place this spring until March. In theory, if the farmers were able to harvest normally this July and were able to use pesticides and fertilizers between now and then, the crop would have been in the region of 26 million tonnes. Agri experts estimate that without the fertilizers and with the reduced number of fields that crop is likely to be 35% to 40% lower.
Then there is the issue of transport. Most of Ukraine’s wheat is exported through the port of Odessa which has stopped operating since the start of the Russian invasion. Russia has made it very clear that is has its eye on that port. For Egypt, Turkey, Bangladesh and Nigeria, the main buyers of Ukrainian and Russian wheat, this means having to look elsewhere for supplies.
What about other wheat suppliers?
India could provide some additional supplies as local farmers have increased planting. According to the US Department of Agriculture (USDA) India is set to have a record high wheat harvest this year of 107.6 million tonnes. Most of this will be sold at home but exports are likely to reach 1.75 million tonnes.
US farmers have also indicated that they will start planting more wheat in the upcoming season that starts at June this year, but this decision was made before the conflict in Ukraine and was related to domestic shortages and higher prices. Canada, number three in terms of global wheat exports, won’t be able to do much as its domestic production of wheat declined by nearly 40% last year. Other large producers like Australia and Argentina could step in but are unlikely to make up for the shortfall of Ukrainian grain.
Russia is expected to continue supplying most of its foreign buyers like Turkey, Bangladesh, Nigeria and Vietnam but it is unclear as to how it will be able to maintain consistent supplies to Egypt and other countries in northern Africa.
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