Wheat prices fall as bumper Russian crop replaces Ukrainian supplies

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The price of wheat has been pushed to a near three-year low by an exceptionally strong crop in Russia, but analysts warn that an escalation of tensions between Ukraine and Russia in the Black Sea and high levels of hedge fund bets risk causing a renewed spike.

Prices have fallen more than a fifth since the end of July, even as the Russian invasion continues to disrupt exports from Ukraine, one of the world’s top exporters.

Traders have been betting that a glut of supply from Russia this year will help keep prices depressed at a time when inflation is driving other agricultural commodities such as cocoa and coffee to multiyear highs.

“We have seen wheat prices substantially decline basically as a result of Russia,” said Michael Magdovitz, senior commodity analyst at Rabobank.

But analysts warn that prices could rapidly rise if the war spills out across the Black Sea. Russia’s Black Sea ports handle about 70 per cent of its wheat exports, making it a crucial artery for the global supply of grain.

The fragile nature of the market was underscored on Wednesday when futures prices initially jumped more than 2 per cent to $5.91 a bushel after a Ukraine-bound cargo ship hit a mine in the Black Sea, before falling back.

Global grain prices have more than halved since peaking at more than $13 a bushel in the wake of Russia’s invasion of Ukraine last year. Costs rocketed as Moscow blockaded Ukraine’s Black Sea ports, cutting off one of the world’s largest grain exporters from international markets and threatening a global food security crisis.

A deal last year, brokered by the UN and Turkey, allowed some 33mn tons of grain to be shipped out of Ukraine, helping to bring the price back down, and news of a bumper crop in Russia this season has further damped prices.

Traders are betting that the trend will continue. Short positions in the wheat market — or bets on falling prices — have risen to a three-month high, according to the latest figures from CME, the world’s largest futures exchange.

Investors initially feared the Kremlin’s decision to pull out of the agreement in July would send prices soaring again and push millions more into hunger. However, Russia’s own wheat exports have unexpectedly helped fill the gap left by the shortfall from Ukraine.

Ukraine, which accounted for 9.2 per cent of global wheat exports in the 2021-22 season, the last before the invasion. That is expected to fall to 6.4 per cent for the 2023-24 harvest season, S&P estimates.

By contrast Russia, already the world’s largest exporter, is set to supply 22.5 per cent of global exports for 2023-24 harvest season, from 15.9 in 2021-22. “Ukraine’s loss has been Russia’s gain,” said Magdovitz.

That total may rise again this year. Russia exported 46mn tons of wheat in 2022 and has forecast it will export 47mn tons this year, according to estimates from S&P Global Commodity Insights. “I would not be surprised if they export 50mn,” said Paul Hughes, chief agricultural economist at S&P Global.

Russia’s surplus has also offset fears of falling yields in other major wheat-producing countries. Last week a US government forecast on global output for the 2023-24 season revised down targets for Argentina, Australia and Canada.

But analysts warn that the wheat market remains susceptible to sudden moves higher as the weight of derivatives bets on further declines rubs up against unpredictable geopolitics.

Analysts have warned that the futures price is below the underlying value of the wheat. That raises the risk that an unexpected disruption to global supplies could lead to a jump in the price, as traders are forced to buy futures contracts to cover potential losses.

“If you’re a speculator you may want to be careful, if Russia suddenly cannot supply then there’ll be a spike in price,” said Magdovitz.

Andrey Sizov, managing director of Black Sea grain consultancy SovEcon, warned that Moscow could try to put a floor on prices by limiting exports. That would also ease the burden on the country’s stretched export infrastructure, he said.

The end of the Black Sea grain deal increased the risk of market-moving attacks from both sides, Sizov added.

The successful voyage of another vessel, Resilient Africa, from a Ukrainian Black Sea port on Tuesday signalled that Ukraine could reopen their sea export route from Odesa and set up a Black Sea grain deal without Russia.

The move will almost certainly draw a response from Moscow — particularly if Kyiv celebrates the grain corridor as a triumph in the Black Sea, according to Sizov. “I think after that we’ll see a reversal,” he said. 

Wheat prices in Chicago briefly jumped as high as $7.77 in July when Moscow said all vessels operating in the Black Sea could be targeted and later that month increased 12 per cent when Russia launched attacks on Ukrainian grain ports.

So far, Ukraine has shown “great restraint” in not retaliating but if that were to happen “prices would go much higher,” said Hughes.