The escalating conflict between Russia and Ukraine, which are top global exporters of wheat, has hit crop production and is driving up prices in several parts of the world. But will this affect me and my bread budget? Let’s find out!
Ukraine halts grain supply: Will the price of bread rise?
Wheat is one of the most widely produced grains in the world, leading the grain market along with corn and rice in production and sales. Wheat is an important trade commodity due to its durability, longevity and its use as flour.
While the US is commonly referred to as the ‘breadbasket of the world’, given that it supplies cereals, grains and rice to the whole world, Ukraine is a country that has long-been similarly dubbed Europe’s breadbasket as the country supplies about a quarter of the world's wheat.
Ukraine, Russia account for 29 per cent of the world’s wheat
Ukraine accounts for 12 per cent of world wheat exports, and top wheat supplier Russia covers 17 per cent of the trade. The massive fertile plains of black soil makes the second-largest European country Ukraine one of the most apt places on the continent to grow wheat, along with south-western Russia.
While Ukraine ships more than two-thirds of its annual wheat harvest, Russia ships half of its wheat crop each year and it has more leftover at the end of the season versus Ukraine. Agricultural economists evaluate how if Ukraine wheat doesn’t get shipped, or planted acres are down, it will up export prices.
Moreover, last week it was announced that all ports out of Ukraine will be closed until the end of the conflict, implying the stoppage of grain exports out of the Eastern European nation, among other agricultural commodities.
What countries will face the immediate effects of grain shortage?
Commodity analysts evaluate how an interruption to grain supplies in Ukraine would be easily noticeable as the majority goes to exports and little gets put into storage.
Ukraine accounts for 20 million to 29 million metric tons of the world’s wheat exports, and supplies from all exporting countries, are close to 200 million metric tons, depending on the year, the weather. So, we’re looking at a significant share of world exports impacted and an evident shortage.
Moreover, if the nations that predominantly export grains are hit, the potential consequences for grain-importing nations like those in Africa and different parts of Asia are notably significant, like Egypt, Turkey and Indonesia.
In other words, much of Ukraine and Russia’s black soil plains are no longer solely Europe’s breadbasket but also an important source of supplies for Asia, Africa and the Middle East.
Are food prices expected to rise further in the coming months?
With food prices worldwide already at levels not seen in at least in over half a century, commodity analysts are flagging how an intensifying conflict could hurt the production of grains and hike global wheat prices even further than it is now.
As per the latest available data, world food prices expectedly surged in February, posting a near 21 per cent increase year-on-year, the UN food agency said last week, but the projections did not take into account the possible impact of the conflict between Russia and Ukraine.
But grain prices were already trending upward before the Russia-Ukraine conflict, exasperating doubts among price watchers who questioned whether one of the biggest wheat-exporting regions in the world would be shipping grain this year or selling at a price damaged by crisis-induced sanctions.
Should I be worried about price inflation of raw materials like grains?
Soaring prices of raw agriculture materials like wheat have broad repercussions for households, and potentially threaten a world economy trying to recover from the damage of the COVID-19 pandemic.
Emerging markets (some notable economies include India, Mexico, Pakistan and Brazil), in some cases already under pressure from weaker currencies, are particularly vulnerable because food costs make up a larger share of their spending.
For the poorest and often politically unstable countries, the surge in raw materials such as grain or wheat threatens to further stoke global hunger.
What higher grain prices means for everyday household budgets?
The surge in raw material prices has already been stoking fears of a higher rise in inflation. The key question for analysts is whether the price increases will be short-lived or morph into long lasting, broader inflation worldwide.
Analysts mostly agree that global producer prices (prices received by producers for their output) will continue rising into the quarter ahead, but they are divided over whether the price surge will be transmitted to the consumer side.
Moreover, rather than across-the-board inflation, price pressures are affecting different economic sectors unevenly. With the added pressure brought on by a possible grain shortage in some parts of the world, analysts see the ripple effects hurting household budgets as well – albeit in a smaller way.
How do futures contracts affect price of raw materials like grain?
Buyers of raw materials use futures contracts to fix the price of the commodity they are purchasing. That reduces their risk that prices will go up. Sellers of these commodities use futures to guarantee that they will receive the agreed-upon price. They remove the risk of a price drop.
A futures price is a locked price of a commodity that is promised and agreed upon for a future date. A futures contract value will fluctuate, according to the market price of that asset.
So with the Ukraine-Russia crisis leading to a price surge, agricultural economists opine how farmers need to be thinking about crop insurance for the coming year and whether it makes sense to lock in contracts for September-December delivery.
How will pricier future contracts translate to supermarket prices?
Wheat futures soared to prices not seen since 2008 this week. The higher prices make wheat more expensive for food makers, who will likely pass those costs on to consumers. Let’s delve into economics.
Depending on how the outcome of the conflict plays out and how long it goes, wheat farmers in Ukraine may not be able to plant March-June wheat, among other things. So, they might go a year without any crops.
That will likely push prices on consumer items like cereal and bread higher. However, consumer or supermarket prices usually lag market prices of wheat, grain -- as these commodity prices are contracted in advance. That means the impact may not be felt for weeks or months.
Verdict: How the price farmers are paid affect the price of bread
One thing economists caution consumers against is over associating bread prices with a beneficial increase in what farmers are paid for wheat.
From the point of view of the price of a loaf of bread, one needs to understand that currently, for every dirham they spend on a loaf of bread, about 95 per cent of that is covering the cost of getting the wheat to the miller, to the baker and to the supermarket.
Only the reminder of that, on average, is involved with purchasing the bushel of wheat from which the flour comes. The issue for all food prices, as well as every other price, is actually the impact of the Ukrainian crisis on the price of oil, diesel and the price of fuel.
But that’s the problem common to every commodity being produced, whether it’s a new car or a loaf of bread. There are factors other than the conflict pushing up the price of wheat, which was trending upward strongly before the conflict, as mentioned above.
David Beasley, head of the World Food Programme (WFP), has warned that the conflict in Ukraine could send global food prices soaring, with a catastrophic impact on the world’s poorest, the BBC reported. Read more