Global supply of wheat faces severe shortage

(SGI) - The price of wheat has skyrocketed across the globe in the last month because of the sudden and dramatic impact of the war between Russia and Ukraine. On the Chicago Board of Trade (CBOT), investors saw the price of wheat hit the ceiling on many consecutive sessions due to a ‘short squeeze’, known also as ‘forced buying phenomena’.
Illustrative photo.
Illustrative photo.

From 25 February 2022, the price of wheat for May on CBOT increased from 859.6 cents per bushel to a peak of 1,363.4 cents per bushel, corresponding to an increase of 58.6% within just two weeks. This time the peak has surpassed that of 2008, when the world agricultural sector experienced a severe crop failure due to the La Nina weather phenomena.

Supply disrupted

In a report released in early March 2022, the US Department of Agriculture (USDA) cut Russia's wheat exports for the 2021 to 2022 season to an estimated 32 mn tons, down 3 mn tons compared to the estimated figure in the report in February 2022. Similarly, Ukraine's wheat exports are also forecast to decrease by 4 mn tons, to only 20 mn tons. The reason for this reduction is that export activities at important ports near the Black Sea and the Sea of Azov have either been disrupted or completely stalled since the conflict broke out.

However, the 3 mn ton reduction by USDA in Russian exports seems modest because it is only a decrease in exports due to difficult logistic problems. It is likely that in the next report to be released in April 2022, the US Department of Agriculture will continue to further cut the export estimate of Russia, because Russia has issued a ban on the export of cereals such as wheat, barley, corn, and rye. Specifically, the export ban period will take place between 15 March to 31 September 2022. According to a report of the Russian Ministry of Agriculture, as of 10 March 2022, the cumulative wheat exports for the 2021 to 2022 season have only recorded 26.8 mn tons, about 22% lower than in the same period in the 2020 to 2021 season.

Prices will rise

Global wheat supply was not only affected by the conflict alone, but also by the fact that production output did not expand to keep up with demand. The US Department of Agriculture estimates the current crop production at 778.5 mn tons, while the consumption demand for the 2021 to 2022 season is at 787.3 mn tons, an increase of about 0.6% compared to the previous season. Therefore, if the conflict factor is not taken into account, the output is also 8.8 mn tons short of demand.

The importance of the Black Sea region has been highlighted in the current conflict between Russia and Ukraine. This region supplies the wheat import needs of the Middle East and North Africa regions. Wheat products are considered an essential food of the people there, and this very large population faces a huge food shortage if the conflict in Ukraine continues. For a long time, these areas have depended on wheat supplies from the Black Sea region. This situation is similar to Europe's dependence on Russian gas.

The current disruption to wheat supply could lead to high prices that will affect the majority of the poor in the Middle East and North African regions, and potentially create social unrest, similar to that during the Arab Spring uprising in 2010 that spread across Egypt, Tunisia, and Yemen. Egypt is the world's largest wheat importer, and more that 50% of this proportion comes from Russia and Ukraine. Turkey, which is the world's third largest wheat importer, is even more dependent with nearly 90% of its supply coming from Russia and Ukraine.

During the current ongoing conflict which has disrupted the supply chain, Egypt and Turkey have both moved to ban the export of grains such as wheat and oilseeds, to avoid the risk of a domestic food crisis. Algeria is the fifth largest wheat importer in the world and the country has now banned the export of wheat as well. The current turmoil in Ukraine has caused many regions to find solutions to increase domestic wheat production in their own localities.

Global wheat supply

Egypt is likely to replace Russia for supplies to and from the US and Europe. Algeria is also looking at France for wheat supplies. China has moved to increase wheat imports after the removal of import restrictions on wheat from Russia. The reason is that the country's winter wheat production is expected to decrease by about 30% due to rainy weather.

For countries that can strengthen their wheat exports, now is the best time to increase their export market base. According to forecasts on the global supply of wheat by the US Department of Agriculture, Australia will increase wheat exports by 7.8%, to touch 27.5 mn tons, while India will increase by 21.4% to reach 8.5 mn tons. For North Africa and the Mediterranean countries, replacing the supply from the Black Sea with supply from India is a reasonable choice because although the transit time will be longer, it will come at a lower cost.

The current concerns are not only about the disruption in supply chain, but also reduction in the supply volume for the next season, from this year until next year, starting from May 2022. The conflict in Ukraine will most severely affect its production due to lack of labor, lack of fuel, and lack of fertilizer, as well as reduced farming areas due to consistent bombing. Ukraine's current wheat production is more than 30 mn tons per year, but if the conflict drags on for a long time, output could drop by 50% to 15 mn tons, which will cause a huge shortage in the global market. Fertilizer shortage and increase in fertilizer prices will not just occur in Ukraine, but it will remain an ongoing problem that will resonate globally due to skyrocketing oil and gas prices. Under these drastic conditions, wheat prices are expected to continue to increase globally.

Các tin khác