War drums on the Russia/Ukraine border are increasingly impacting wheat prices. Rising tensions between the two big agricultural producers, and possible Western sanctions against Russia, could heighten market volatility further.
Chicago wheat futures prices, the global benchmark, rose 6% on Tuesday and are now up 10% since the start of the year. Black Sea wheat export prices — a key indicator of any supply shortage in the region or of weakening demand from importers — are down about 6% as of Friday since the start of the year, compared with a drop of about 2% for EU export prices.
Russian troops have moved into two territories in eastern Ukraine — Donetsk and Luhansk — which together account for about 10% of Ukraine’s wheat production. The US and European allies are said to be readying sanctions against Russia, which has laid claim to all of Ukraine.
Wheat prices had been slow to respond to Russia’s most recent threats against Ukraine, likely reflecting memories of the short-lived market moves when Russia last invaded its neighbor and seized Crimea in 2014. Between February and the end of March 2014, Chicago wheat futures prices rose 25% on fears of disruption to global grain supplies. Instead, the export pace of wheat from Ukraine remained strong on the back of a large harvest in 2013. By the end of the season, on June 30, 2014, exports were up 36% year over year and Chicago wheat prices were back to pre-conflict levels.
Much will hinge on Western sanctions against Russia, which could be more severe than those imposed in 2014. Russia and Ukraine combined produce 14% of global wheat and supply 29% of all wheat exports. They also provide 17% of worldwide exports of corn. The two countries play a dominant role in world sunflower oil supplies, shipping 76% of exports. Worldwide shortages have pushed a wide range of vegetable oil prices higher, and Black Sea sunflower oil futures are up 11% so far this year.
Production prospects for Russia and Ukraine winter wheat crops are currently favorable, as shown by Gro's Black Sea Wheat Yield Forecast Model. A strong harvest would be good news for global wheat supplies, which are at their lowest level since 2013.