Ukraine’s political crisis and global wheat prices

Pic Courtesy: bbc.co.uk
Wheat harvest in Ukraine. (Pic Courtesy: bbc.co.uk)

Analysts across publications have emphasized a correlation between the ongoing disturbances in Ukraine and the prevailing wheat prices in the global market. Despite the threat of a meltdown predicted to be imminent following the Russian incursion into Crimea fizzling out, speculators are betting hard on a rally in the wheat prices.

Concerns were expressed over the possibility of a massive disruption in the supply chain in Ukraine as a result of the major exporting ports in the Black Sea region becoming non-functional. Ukraine’s biggest grain exporting port, Odessa is located 180 kilo meters North-East of the Crimean region and other major ports Yuzhniy and Nikolaev are 150 kilo meters away.

While at Nikolaev, ship crews are exercising some caution, there are no disruptions at the other two ports, according to a report by Bloomberg.

However, globally the increase in wheat prices is a reversal of the trend. According to a report in Business Line, since 2012, wheat prices were decreasing, being traded at a low of $5.50 a bushel in January 2013 compared to the high of $9.47 a bushel in January, 2012 at the Chicago Board of Trade. The polar vortex in North America and dry weather in Latin America delayed the shipments out of US, Canada and Argentina and this became the initial spur to a hike in wheat prices.

The role played by Ukraine in the global wheat market is not that large. It contributes only six percent to the global export market for wheat. Crimea, the epicentre for the re-emergence of some of the Cold War era tactics, accounted for a mere seven percent of Ukraine’s total grain exports. As reported by Star Tribune, Casey Chumrau, market analyst for US Wheat Associates said, “There is potential for market disruption in the future, but at this point it (rally in wheat prices) is market speculation.”

Wheat production in the last few years has reached record proportions, which means the possibility of a supply shortage, unless artificially engineered, is highly unlikely. According to the estimates of US Department of Agriculture, global wheat supply will be 888 million tonnes in 2013-14, increasing four per cent over last year’s supply. Projecting an increase of 3.7 percent over last year, the global demand for wheat in 2013-14 is estimated to be around 704 million tonnes. So, globally there is a surplus.

Recently, the economist for Food and Agriculture Association (FAO), Dmitry Prikhodko, advised the Ukrainian government and the grain-market participants to issue assurances of execution of the export contracts to the major importers of its grain, the countries of North Africa and Near East, in order to keep the prices of Ukraine’s grain stable. The idea is to break the tide of negative perception.

A few analysts have even seen an advantage for Indian exporters of wheat, emanating out of the possible supply shortfall from Ukraine, in turn placing a premium on the wheat of US and India. However, much of such analysis is based on blocking off of the major grain exporting ports of the black sea region, a scenario which does not seem to be materialising in near future. According to a Bloomberg report, wheat prices have already started to ease following forecast of rains in wheat producing regions of USA.

Tangible concerns can be raised about the likely adverse impact of political instability on the spring crops. The financial crisis in Ukraine has led to the depreciation of its currency. This would mean that the input costs for farmers will increase substantially as they will be forced to pay higher price for fertilizers.

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