January 19, 2023

Wheat prices back to post-invasion lows in a positive for inflation fighting central banks

Food inflation has taken hold across the world. In places like America and Europe, food prices were up by more than 10% y/y in December. Nonetheless, the situation seems to be improving. Wheat prices have eased considerably off the highs seen in the initial months following Russia's invasion. Food inflation in m/m terms is already showing signs of a slowdown. The grain deal, which came into effect last August, is clearly having an impact. Ukraine managed to ship 4.75 Mt in total seaborne wheat tonnage through the final five months of the year.

The war in Ukraine was certainly a net positive for global wheat prices, at least through the middle half of 2022. CBOT spot wheat futures briefly spiked to levels north of $14/bushel in the initial aftermath of Russia’s invasion and managed to hold above the $10/bushel level for the better part of three months. This was a true supply side price shock given spot wheat had been trading at or under $8/bushel in the days leading up to the start of the war, which was already at elevated levels after two years of Covid-led disruptions. The situation has since shown notable improvement following on from a real easing in price pressures over the past several months. After a brief spike back above $9/bushel through September, CBOT wheat is currently trading at just $7.51/bushel as of January 17th. The same can be said of CBOT Black Sea wheat futures prices, currently trading at $307/t, down from a peak north of $425/ton in June of last year to hold at the lows post-invasion. It is important to emphasize that even with the recent price correction, wheat is still trading at well above the high’s pre-pandemic (<$6/bushel), implying ongoing pressure, especially for developing countries.

Elevated wheat prices have contributed to the high inflation problem across most major economies. Within the European Union, food CPI finished up 13.8% y/y and 0.7% m/m in December. EU food manufacturing PPI, a measure of factory gate inflation, also remains elevated, coming in at an annualized rate of 22% in November. CPI gains in America (+10.4% y/y, +0.27% m/m) and Japan (+7% y/y, +0.7% m/m) were similarly elevated. Nonetheless, the m/m CPI increases seen in the EU and the United States were both the smallest since the year began in a sign that the easing in wheat prices are starting to flow through to lower food inflation. Japanese food inflation appears a bit more aggressive, but still showed a slowdown m/m for the first time since August. The decline in prices realized through the 2H of last year, excluding the brief move higher in September, should continue to weigh on inflation levels over the next 6 months, helping assist a number of central banks in their goal to tame the rate at which prices are increasing.

Monthly Annualized Food Inflation Across United States, Japan, Euro Area (%)

Source: BLS, EuroStat, eStat; Data for Japan through November 2022, data for US and EU through December 2022

Recent downward price movements are hardly surprising. A grain deal brokered between Russia and Ukraine in August has played a pivotal role in providing a lift to the global supply and export of wheat tonnage. In September, Ukrainian wheat farmers managed to ship 1.32 Mt via seaborne methods, reversing months of little to no trade. This fell far short of year earlier “normalized” levels, which managed 4.12 Mt, but any volume is better than no volume at all. A brief panic set in late-October when Russia temporarily pulled out of the grain deal, bringing into question whether a safe corridor of passage through the Black Sea would be upheld. The decision was effectively reversed days later. Russia has several emerging market partners, including Egypt, that need access to Black Sea grain shipments. Even if Ukraine emphasizes sales to countries other than places like Egypt, as has been true in the intervening months, the additional net export supply provides some downward pressure on prices, a net positive.

Over the final five months of 2022, the period in which the grain deal was in effect, Ukraine managed to ship 4.75 Mt in total wheat tonnage, down from 14.62 Mt over the same period a year earlier. The war is clearly taking its toll with disruptions rippling through the entire supply chain. Even so, as reiterated above, some volume is better than no volume at all. The mix of destination countries seems to have shifted considerably relative to earlier periods. On a market share basis, shipments towards Spain (1.2 Mt) accounted for 25% of all exports over the final five months of the year, a big increase in share relative to the same period 2021 (1.6% of total). Departures towards Turkey (16.3% of total) and Bangladesh (7.9% of total) were also far larger takers of Ukrainian grain while flows towards Indonesia (5.3% of total) and Egypt (5.3% of total) declined dramatically in share terms. In general, it is Southern Europe that seems to be showing the most willingness to lift volumes from Ukraine following the grain deal in August. The situation around Indonesia and Egypt is particularly troubling with both countries realizing a combined 4.3 Mt y/y cut in seaborne wheat arrivals through 2022, a clear sign of the disruptions taking place as a result of the war in Ukraine.

August to December Ukrainian Seaborne Wheat Exports by Destination (Mt, left) and Share of Total Shipments to Southern Europe (%, right)

Source: Kpler

The question moving forward is whether prices could continue to ease into 2023. This outcome looks less likely. According to the USDA, world supply of wheat for the 2022/2023 growing year is set to finish at 780 Mt, nearly 9 Mt below projected demand. This is an improvement from initial forecasts in July of last year, when the imbalance was projected to come in at more than 12 Mt, but the shortfall will still force a draw on inventories, providing support for prices. This aligns with the situation in Ukraine. While exports have increased off the zero lower bound, Ukraine is still far from the sort of export levels that were normal before the invasion began. USDA estimates have Ukrainian wheat production at 21 Mt for 2022/2023, down from 33 Mt estimated for the 2021/2022 period. This is largely a result of a decline in harvested area, estimated at 5.4 million hectares, down 28% from 2021/2022.

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