Why the Russia-Ukraine crisis may make food-price inflation even worse

Tired of paying higher prices for groceries? Don’t expect your weekly bill to get any cheaper. Prices for grains look set to climb even more if Russia invades Ukraine.

If that were to occur, prices increases for the big three grains: wheat, corn, and soybeans would impact consumer food costs, including cooking oils, says Sal Gilbertie, president and chief investment officer at Teucrium Trading.

“The Russia/Ukraine situation could disrupt a major global source of wheat and corn exports for an unknown period of time,” he says.

Wheat would be the food commodity most impacted, says Arlan Suderman, chief commodities economist at StoneX. Russia is the world’s largest exporter of wheat, and Ukraine is also a major exporter. Combined, the two countries are responsible for 29% of the global wheat trade, says Suderman.

“A prolonged military conflict that disrupts trade could make much of that wheat unavailable to the export market,” he says.

Many commodities have already been impacted based on the risk of what might happen, Suderman says. He estimates that about 80 cents per bushel in risk premium is already in wheat prices, which would be a little more than a penny for a loaf of bread. “We could see the cost of wheat in each loaf of bread go up another [one to three] cents if war breaks out,” he says.

The cost of rising energy prices likely adds even more. He notes that most of the cost of a loaf of bread is tied to production, packaging, and transportation costs, which have also been affected by geopolitics. The price of oil, for example, recently climbed to a more than seven-year high on the prospect of war in Europe.

Pasta and flour prices will also be affected, says Gilbertie. Because global wheat supplies have been strained over the past two years, the impact for consumers will likely be immediate, he adds.

Ukraine, meanwhile, is one of the world’s largest grain and vegetable oil exporters, and a major exporter of corn.

Rising corn prices affect soybean prices because they both compete for the same crop land. “Soybean supplies are tightening rapidly due to bad weather in South America, which means both corn and soybean prices will have to compete with one another (through price increases) in order to ‘buy’ more acres this spring across the Northern Hemisphere,” Gilbertie says. Higher prices for those two commodities would affect many packaged foods, which contain corn and soybean oils, he adds.

Consumers have faced high food costs since the pandemic began. Food prices, as measured by the consumer-price index, rose 3.4% annually in 2020 and 3.9% in 2021, a significant increase from 2019’s 1.9% gain. Food prices are expected to rise between 2% and 3% this year, according to the U.S. Agriculture Department.

Futures prices for wheat
WH22,
-1.94%

W00,
-1.94%

and corn
CH22,
-2.44%

C00,
-2.44%
,
as well as soybeans
SH22,
-0.78%

S00,
-0.78%
,
have climbed in recent years, with 2021 marking a fifth straight year of gains for wheat. Corn futures posted gains for four years in a row, and soybeans have tallied three straight years of gains. All three commodities saw prices reach multiyear highs last year, with wheat and soybeans climbing to their highest settlement prices since 2012 and corn at its highest since 2013.

As of Tuesday, wheat futures were already up nearly 4% so far this year, according to Dow Jones Market Data. Corn futures have gained more than 10% and soybeans have traded more than 17% higher. 

“Grains are a big story right now” with potential grain-export disruptions from the Russia/Ukraine situation, China’s tight grain supplies and South America’s “significant” soybean production problems, says Gilbertie.

“Exciting and uncertain times lie ahead,” he says.

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