If anything happens to those exports, whether through warfare or sanctions, the impact will be severe.
“The price impact of the withdrawal of such amount of wheat would be extraordinary, especially because the demand for human consumption of wheat is very inelastic,” said Carlos Mera, senior commodity analyst at RaboResearch, in a Linkedin post in January laying out the magnitude of a then-theoretical invasion.
Mera noted that the Chicago Board of Trade price of wheat went up by 21% in 2021 after a decade of low crop output ran the global deficit of wheat up to 8.8 mmt, according to the USDA. He then noted that compared with that regular market shortage, a crisis in Ukraine would put six times the amount of wheat in jeopardy. If that wheat was taken off the market, he estimated that prices could double, and countries in the Middle East and northern Africa, major importers of Russian and Ukrainian wheat, would deal with severe shortages.
Enter China
No sanctions have been placed on the global wheat markets yet, and it is unclear what shape they will take. But China is using this time as an opportunity to strengthen its bilateral ties with Russia through the grain market.
China’s General Administration of Customs announced on Thursday it is open to importing wheat from all regions of Russia, giving Putin an alternative to Western markets that might be closed under possible sanctions.
China previously shut out Russia for wheat imports owing to concerns over possible fungus and other contamination.
According to a Rabobank research note, if there is a war and the West puts sanctions on Russia’s wheat supply, the price of grain will depend entirely on a trade deal with China. If China can buy the massive volumes of wheat it needs almost exclusively from Russia and Ukraine, global buyers could buy from origins previously serving China’s needs.
Possible sanctions
Russia’s outsize impact on wheat prices and its role as a “commodity superstore” raises the risk that the crisis will “exacerbate the current global inflationary dynamics,” said Helima Croft, global head of commodity strategy at RBC Capital Markets, in a note to clients. Russia and Ukraine together produce around 29% of the global export of wheat.
The tensions in the region are going to bring volatility in export prices in the coming weeks, according to reports by S&P Global Platts, with traders noting demand for Australian and Argentinian wheat was likely to increase as the conflict gets worse.
What wheat sanctions look like against Russia remain unclear, but according to Mera in the LinkedIn note, “the impact of an embargo on Russian wheat would be so large, that any sanctions are likely to allow for an exception for wheat exports.”
While unlikely, Mera adds, “Stranger things have happened.”
