Westhoff: What goes up: Grain prices since the Russian invasion of Ukraine
It was just a few weeks ago that the news was filled with stories about how the war in Ukraine was causing a dramatic global spike in prices for wheat and other crops. Recent developments are a reminder that what goes up usually comes back down.
Movements in grain futures markets have been dramatic. Wheat for delivery in September 2022 closed at $7.84 per bushel on Feb. 16, a week before the Russian invasion. By May 17, that same contract was trading at $12.79 per bushel.
Traders were concerned that a sharp reduction in exports from Ukraine would limit global supplies at a time when global stocks of grain were already relatively small. A number of countries were scrambling to secure grain from other exporters. India announced restrictions on wheat exports in an attempt to hold down domestic prices.
These concerns were reasonable, but the magnitude of some of the price changes were surprising. Ukraine is a major grain exporter, but it accounts for a relatively small share of global production. I thought that the price increase required to allocate global supplies should be much smaller than the one actually observed.
More than just the war in Ukraine contributed to higher prices. For example, drought in the Plains states was expected to limit winter wheat production, and excess rain in North Dakota reduced spring plantings.
Still, it didn’t quite seem to add up — even considering the crop concerns, the changes in wheat prices seemed out of line with the magnitude of the supply disruptions.
Then, just as suddenly as prices rose, the story changed. By July 1, the September wheat contract had dropped back to $8.46 per bushel, down by roughly one-third from the peak value.
So, what happened? I’m not sure I have a definitive answer. Yes, some of the pessimism about the 2022 U.S. and world wheat crop abated. Yes, there was reason to hope that more Ukrainian wheat would make it into global markets than originally feared. Russia was having a good crop with strong export prospects, in spite of western sanctions.
Still, those changes alone do not seem sufficient to explain such a large decline in prices. The same story was true for corn and other commodities as well — most of the price increase that occurred after the Russian invasion was wiped out in just a few weeks.
One troubling possible explanation for what we’ve observed is that the market may be anticipating that a recession will weaken demand for agricultural commodities. Declines in the stock market provide one of many indicators that investors are less optimistic about the economy than they were previously.
Weaker farm commodity prices will not necessarily result in an immediate sharp reduction in consumer food price inflation. Farm commodities make up only a small share of the retail value of a loaf of bread or a pound of meat, so even big changes in farm-level prices tend to translate into only small changes at the grocery store, and often with a lag.
And, of course, commodity markets can change quickly. What I write today may be out of date by the time you read this if market participants become concerned about a summer drought or other news.
Pat Westhoff is director of the Food and Agricultural Policy Research Institute at the University of Missouri and a professor of agricultural and applied economics. The opinions expressed here are his own and do not reflect official positions or endorsements of the University of Missouri.
This article originally appeared on Columbia Daily Tribune: What goes up: Grain prices since the Russian invasion of Ukraine
