Conflict Causes a Rise in Market Prices

Article by: Hari Yellina

The Russian invasion of Ukraine may have only been underway for less than two weeks, but it has thrown global grain supplies into disarray and pushed wheat prices to the peak point in 14 years. Each year, the Black Sea region accounts for around one-third of global wheat exports. Due to port closures, sea mines, and the soaring cost of insurance for vessels entering the region, trade out of the Black Sea region has come to a halt. Many maritime companies have halted service to the Black Sea ports that have been impacted. At least five commercial vessels have been struck by missiles or mines since the invasion began almost two weeks ago.

Last week, an Estonian-owned cargo ship sank after hitting a suspected mine outside Ukraine’s main Black Sea port of Odesa, with four crew members still missing. This happened an hour after a missile struck a Bangladeshi vessel anchored in the port of Olvia, killing one of its crew members. The May wheat contract on the Chicago Board of Trade (CBOT) closed at a mouth-watering US$12.09 per bushel ($602.70 per tonne) for the third day in a row on Friday last week. The contract has gained US$3.4925/bu ($152.30/t) – or 40.6 percent – in five trading sessions after the market traded limit down on Friday of the previous week.

The contract’s year low was posted on January 14, and it has since risen 62.4 percent, or US$4.645/bu ($231.50/t). Because of the severe volatility, the CBOT established new daily price limitations for wheat on Monday, March 7th, which will last until May 2022. Exchange laws will change the present restrictions of US$0.50/bu expandable to US$0.75/bu to US$0.85/bu expandable to US$1.30/bu. The daily price restrictions for all contract months will increase to US$1.30/bu the next business day if two of the first five listed non-spot contracts settle at limit, or if the May contract settles at limit. Price ceilings will be raised until all contract months subject to a daily ceiling have not settled at the new level.

On the following business day, all contract months’ daily restrictions will revert to the initial price limit. Wheat consumers around the world face a difficulty because supplies are already depleted. Not only does the conflict jeopardise Russian and Ukrainian grain exports for the remainder of the 2021-22 marketing year, but it also hampers Ukraine’s spring and summer crop plantings, as well as the new crop harvest. Depending on how long the battle lasts, supply shortages are likely to last far into the 2022-23 season, and possibly beyond. The longer it goes on, the more likely supply interruptions will emerge. Since the crisis began, demand for European Union wheat has risen dramatically.