The war in Ukraine has quickly highlighted the fragility of grain markets. Prices have responded to the upside as a result. While loading disruptions have yet to surface, strict sanctions, a Russian agreement with China and disappointing Ukrainian yields are all likely to weigh on Black Sea loadings as the harvest season approaches in Q3. Med purchasers are poised to feel the biggest impacts, albeit the United States could help to fill the supply gap.
The war in Ukraine has quickly highlighted the fragility of global oil and gas markets at a moment when energy inflation, driven by supply constraints and post-Covid economic recoveries, has become acentral narrative. What is often forgotten is that Ukraine and Russia are also key producers of grain to the global market. According to the USDA, Ukraine accounts for just over 3% of global wheat (24.4 Mt) output. Russia plays an even more important role - the country produced some 78.1 Mt in 2021, roughly 10% of the global total.
The upward trend in wheat prices feeds into short-term gains as the war in Ukraine continues. On 17 February, a week before Russia began their invasion, CBOT wheat was trading just under $8/bushel. By 24 February, prices had surged by 16%, topping out at $9.26/bushel and on 1 March, as this research report was readying to be published, prices were surging, holding just over $10/bushel, up by nearly 8% in a single day.
The increase in wheat prices over the past five days area rational reaction to the possibility that Ukrainian production, alongside outputin Russia, could face serious export disruptions. This is problematic given the absolute size of wheat exports out of UKR/RUS – in 2021, combined seaborne departures shipped via the Black Sea finished at 38.7 Mt, accounting for 35% of total seaborne global exports.
Med purchasers have few good alternatives in which to source wheat from abroad. The United States, which shipped roughly 18.8 Mt in 2021 is one viable option. Theoretically, higher Russian wheat volume over land into China could free up volume departing from the Gulf of Mexico to head east towards Europe. Canada is another option, albeit of the 12.5 Mt that was shipped in 2021, only 3.1 Mt is exported via the east-coast. France could also play a role at the margin – the country shipped 0.85 Mt towards China in 2021. This is volume that could easily find a market in the Med.
The extent to which wheat exports will decline as a result of the war in Ukraine is a dependent on several factors. First, and most obviously, Ukrainian yields are going to suffer as domestic farmers flee, leaving fields untended. Second, the exclusion of Russian banks from SWIFT will make it difficult for Western banks to transact for Russian tonnage. While agricultural products, similar to energy, are exempted from sanctions restrictions, it is likely that the willingness to take Russian wheat could decline precipitously. Finally, shipowners are likely to remain wary of venturing close to the Ukrainian coastline. The cost to ensure such voyages are rising and for good reason. US agricultural producer Cargill already issued astatement indicating one of its chartered ships had taken damage from a Russian missile.