Global wheat prices rallied sharply last week on the back of tensions between Ukraine and Russia. However, the gains need to be kept in context. So far nearby futures have remained under 800 US cents a bushel, and well down from the peaks seen in December and November.
In $A terms nearby futures did move back above $A400 a tonne for two days, but in our cash markets, prices were still as much as $50/t under harvest highs. Those holding wheat waiting for a return to prices missed from harvest still have a long wait ahead of them.
The Ukraine/Russian tensions could result in a twofold impact on the grain markets. Firstly, there is the disruption to logistics for exports from Russia, Ukraine, and other countries that use the Black Sea for shipping. Military action could see shipping lanes closed either through direct action, or from a safety concern.
Secondly, any military action will trigger a raft of sanctions from the United States. These will be far reaching and impact energy markets as well as grain markets.
We are most likely to see a period of volatility as the market weighs up the risks from day to day. Diplomatic overtures will be watched closely and assessed for their relative chances of success daily, with the interpretation of possible outcomes feeding into the grain and energy markets in particular.
What seems apparent is that Russia wants to see a Russian leaning government installed in Ukraine, replacing the current government that leans more towards Europe and the US. The Russians will try to influence Ukraine to achieve this end, with the threat of military intervention persisting until their objective is met.
That means there is a very real risk of military action and if that occurs, wheat prices are likely to spike sharply, even if just for a brief period while the market works out what it really means.
Longer term there will still be Russian and Ukrainian wheat available that will need to be exported. Eventually any disruptions will cease, grain will flow again, and prices will decline sharply.
In other words, in the end, global supply and demand fundamentals will take over from short term geopolitical price drivers. Prices will pull back. In fact, if there is a significant backlog of supply from the Black Sea when trade resumes, the impact on the market could be significant, pushing prices too low for a while.
This week this still all seems ahead of us, and it may fade away to nothing, although that seems unlikely right now. The timing of any market upheaval will be hard to gauge, and the period of price disruption will also be hard to predict.
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