Talks to resume Ukraine’s export weighs?

The US wheat prices fell over the past month amid talks in late May to reopen key Ukrainian export channels following months of blockade in the Black Sea. The prices have previously spiked to record highs in light of Russia’s invasion of Ukraine.

The July Chicago soft red wheat (SRW) contract traded on the Chicago Board of Trade (CBOT) settled at $10.71 a bushel (bu) on 9 June, down 2.0% from $10.926/bu on 9 May. Prices remained near record-highs in February 2008.

Although the SRW wheat prices fell from the previous month, it was 57.4% above the same time last year. The front-month Chicago wheat prices have been rising since Russia’s invasion of Ukraine on 24 February and hit a record high of $13.40/bu on 4 March, as seen on the wheat price graph below.

According to the CBOT’s historical wheat prices, the 4 March’s peak exceeded the previous record high of $13.34/bu on 1 February 2008.

Will the talks to reopen Black Sea export corridor help to alleviate the surging wheat commodity price or is there another record high to come? Here we take a look at the latest wheat price outlook and what factors are shaping it.

Russia’s invasion of Ukraine drives wheat prices higher

Russia and Ukraine are major grain producers and exporters. According to the Food and Agriculture Organisation (FAO), Russia exported 32.9m tonnes of wheat in 2021, accounting for 18% of global trade, while Ukraine shipped 20m tonnes, equivalent to 10% of global market share.

Following Russia’s invasion of Ukraine on 24 February, Russia blockaded the Black Sea, which is the main export route for Ukrainian commodities. Prior to Russia’s invasion, Ukrainian grains were exported from the Black Sea ports which include Chornomorsk, Mikolayiv, Odessa, Kherson and Yuzhny.

Ukrainian ports will remain closed and commercial shipping will be suspended until the end of the Russian invasion, according to Ukraine’s Maritime Administration in March.

The blockades halted most of Ukrainian grain exports, which led to a surge in global wheat market prices since late February.

According to agricultural industry association Ukrainian Agribusiness Club (UCAB)’s update on 9 April, Ukraine has only exported 220,000 tonnes of grains by rail as of March this year.

UN in talks to plan Black Sea export corridor

As many low-income and food-deficient countries relied heavily on grain imports from Russia and Ukraine, the war has sparked a global food crisis.

In the latest wheat price news, the UN has been in talks with Russia since late May to plan an export corridor in the Black Sea to resume grain and fertiliser exports. If this plan was to be successfully implemented, the resumption of Ukrainian wheat export would ease the existing tight global grain supply.

The UN Secretary-General, Antonio Guterres, said in a press conference in Sweden on 1 June that there needs to be a “quick and decisive action to ensure a steady flow of food and energy in open markets, by lifting export restrictions, allocating surpluses and reserves to vulnerable populations, and addressing food price increases to calm market volatility.”

The UN is facilitating an export corridor in the Black Sea, which will allow the “safe and secure export of Ukrainian-produced food through the Black Sea”, “along with unimpeded access of Russian food and fertilisers to global markets, especially developing countries,” said Guterres.

According to UN spokesperson Rebeca Grynspan, she had “constructive discussions” in Moscow on 31 May with Russia’s First Deputy Prime Minister on the issue of facilitating Russian grain and fertiliser exports.

Following the announcement, Chicago wheat prices started to fall as traders withdrew their positions to take profits.

There is a plan to open a corridor via Turkey for grain exports from Ukraine, but this is still in discussion between Ankara, Moscow and Kyiv. Despite the uncertainty surrounding a potential export resumption, there is cautious optimism in the market.

Alternative export route by rail through EU

Earlier in May, the European Union (EU) has set out an action plan to establish “Solidary Lanes” to help Ukraine export grains by rail across Europe.

“20 million tonnes of grains have to leave Ukraine in less than three months using the EU infrastructure,” said Adina Vălean, the EU commissioner for Transport.

“This is a gigantesque challenge, so it is essential to coordinate and optimise the logistic chains, put in place new routes, and avoid, as much as possible, the bottlenecks.”

However, the export capacity through railways is significantly lower than through seaports. In addition, Ukrainian wagons are not compatible with most of the EU rail network, so goods will need to be transferred onto lorries or wagons that fit the EU standard gauge.

To overcome these challenges in the short term, the EU has urged operators to:

urgently provide additional vehicles
prioritise Ukrainian agricultural export shipments
maximise flexibility to accelerate custom procedures at border crossing points
secure more temporary storage facility for Ukrainian exports

UCAB has pointed out in April that exporting capacity by rail is about 10% of Ukrainian seaports’ capacity, and “the only option to avoid further rising prices and prevent famine is to unblock Ukrainian seaports and resume Ukrainian exports of agro-industrial products.”

Deepening wheat supply deficit in 2022 & 2023

As a result of the war in Ukraine, the sowing area was reduced this year and harvest is expected to plunge in 2022.

According to UCAB, the occupation of some Ukrainian territories by Russian troops, territorial proximity to hostilities, and mined fields have led to a reduction in the sown area.

The Ukrainian wheat harvest this year is expected to fall to 18 million tonnes, down 44% from the previous year, UCAB said on 26 May.

According to US Department of Agriculture (USDA) data, global wheat production for the marketing year (MY) 2022/23 is forecast to fall to 774.8m tonnes, down 4.5m tonnes or 0.6% from the previous MY.

Production in Ukraine was forecast at 21.5m tonnes in 2022/23, and Ukrainian exports were expected to fall by 47% year-on-year to 10m tonnes. Russia was projected to be the top exporter, shipping 39m tonnes, followed by the European Union.

World wheat stocks are expected to fall to their lowest level in six years to 267m tonnes in 2022/23, down 5% from the previous year.

Wheat price forecast 2022-2023

As a result of tight supply, as of 10 June, the USDA expected the US season-average farm price (SAFP) for 2022/23 to reach a record $10.75 a bushel.

According to Dutch agricultural bank Rabo Bank’s wheat market analysis in May, the outlook for the commodity is not as bullish compared to its previous forecast.

“Given that a lasting Ukraine conflict is now priced in, La Niña models are trending more neutral, and demand for a number of commodities is in check (animal feed grains and oilseeds, dairy, cocoa, coffee, and even sugar), our stance on commodity prices is not as bullish as in previous reports,” said Rabo Bank.

In contrast, data and analytics provider Trading Economics forecasted wheat price to trade at $10.74/bu by the end of the second quarter, rising to $11.81/bu in 12 months’ time or by June 2023.

Algorithm-based forecasting service Wallet Investor’s wheat rate projection for the next 12 months was even more bullish at $12.19/bu. The site's wheat price predictions saw the grain rising to $18.20/bu in the next five years.

Given the uncertain geopolitical development and market volatility, analysts have refrained from providing wheat price analysis or forecasts for 2025.

Note that analyst and algorithm-based predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals.

Keep in mind that past performance doesn’t guarantee future returns. And never invest or trade money you cannot afford to lose.

This article first appeared on capital.com

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