War-Strained Wheat Market Faces Moment of Truth

© Reuters. War-Strained Wheat Market Faces Moment of Truth

(Bloomberg) -- The strained global wheat market is entering crunch time. 

July is a crucial part of the year because it’s when harvests start in the Northern Hemisphere and exports accelerate. The invasion of key producer Ukraine has already crippled its sales and attention now turns to how the war will affect the new season’s shipments and how well other countries can plug gaps.

Ukraine has resorted to exporting whatever it can by rail and river with sea ports blocked. Meanwhile, Russia is about to reap one of its biggest-ever harvests, though war-related logistical and financial constraints remain key questions about how much it can sell.

The sales pace from the Black Sea -- which historically makes up a quarter of global trade -- may be in focus more than ever. Despite slumping recently, wheat prices are much higher than normal for the time of year. That’s contributing to food inflation and prompting world leaders to pledge to do more to fight a hunger crisis.

“We in grains have never traded a war market before, so this is all new,” said Dan Basse, president of Chicago-based AgResource. “The Russians are going to have a situation where they’re going to export wheat, but it’s not going to be as easy.”

Wheat shipments from top exporter Russia have remained largely normal since it invaded Ukraine, going to traditional customers. With new crops rolling in, the coming months will show whether it can sell the big volumes usually seen when exports peak.

Ukrainian export prospects remain bleak for now. There has been little progress toward restarting seaborne trade, terminal closures threaten to limit grain shipments to less than half their potential and Russian strikes have damaged crop facilities at ports.

Looking Elsewhere

Any losses from the Black Sea mean importers will rely more on alternative shippers like the European Union. Even the U.S. -- often one of the most expensive origins -- has become more competitive.

There are already signs of a shift in trade. Egypt booked 350,000 tons of French wheat in a tender this week, double the amount it bought from Russia. The huge French volume is unusual, especially early in the season when Egypt normally buys from the Black Sea, adviser Agritel said.

Outside of tenders, the North African country also recently bought its first US cargo of soft red winter wheat since 2019.

Despite Russia having lots of wheat, its exports face challenges. Its agriculture sector hasn’t been targeted by sanctions, but unofficial measures have seen some banks and shipping companies cut back credit lines and services.

That’s making it hard to estimate exports. AgResource predicts Russian wheat exports at about 32 million tons this season and FAO-AMIS expects 35 million tons, near last year’s level. Meanwhile, the US government pegs them at a near-record 40 million tons and consultant SovEcon forecasts they’ll exceed 42 million tons.

Either way, loadings need to ramp up fast to hit their potential, and Russia’s plan to alter a grain-export tax may affect sales.

“On paper, they have the exports,” said Matt Ammermann, a commodity risk manager at StoneX. “It’s just there’s clear reasons they can’t export freely.”