At Any Point

Jake Hanley, Managing Director / Sr. Portfolio Strategist

By the time you read this, it might be too late. 

“…we are now at a stage where Russia could, at any point, launch an attack in Ukraine.” – US Press Secretary Jenn Psaki, January 18^th.

Front-month wheat futures jumped more than 3% today (01/18/2022) amid reports of escalating tensions. Russia and Ukraine are among the world’s largest wheat exporting nations.  Combined they represent approximately 30% of all wheat exports. 

War could significantly disrupt the global wheat trade.

Part II

It has only been 8 years since Russia last invaded Ukraine and annexed the Crimea Peninsula.  Military operations began February 20^th, 2014.[1] One month later the takeover was complete. On March 21, 2014, Putin ratified the “Treaty of Accession of the Republic of Crimea to Russia.”[2]

Front-month wheat futures rallied approximately 18% between February 20^th and March 20^th, 2014.

Supply and Demand

The global wheat balance sheet is already under duress. The USDA is expecting global wheat supplies to decline for the second year in a row.  Diminishing supply amid rising demand has been supportive for wheat prices. An armed conflict between Russia and Ukraine would only make matters worse. 

Yet, it is worth pointing out that the global wheat balance sheet is in better shape today than it was back in 2014.  This is evident when comparing today’s stocks/use ratio to the stocks/use ratio in 2014.[3] 

For instance, as late as February 10^th, 2014, the global stocks/use ratio for wheat was approximately 26%.  Today, that number stands at nearly 36%.  The big difference, however, is that inventories were expanding in 2014.  The expectation for larger wheat supplies in 2014 likely helped keep a lid on prices. 

The opposite is true today.  In fact, prices are currently trading approximately 5% above the 2014 highs. 

Pouring Gas on a Fire

Given the current strength in wheat prices, an armed conflict between Russia and Ukraine, we believe, could help propel wheat futures prices back to retest the November 2021 highs (approximately 10% above current levels).  Wheat prices are likely to continue to rise, building in a “risk premium” in anticipation of a conflict.

To be certain, that risk premium could evaporate very quickly amid a peaceful resolution.  However, the downside could be limited given the expected reduction in global supplies.     

Source:  Bloomberg Finance L.P. generated on 01/9/2022.  This chart is for illustrative purposes and not indicative of any investment.  Past performance does not guarantee future results. 

Conclusion

Wheat prices are currently trading near 9-year highs as the global balance sheet is expected to shrink for the second consecutive year.  An armed conflict between Russia and Ukraine would likely propel prices higher and could lead to a retest of the November 2021 high (approximately 10% above current levels).    While armed conflict appears increasingly likely, there is still the opportunity for a diplomatic solution.  While we expect near-term price volatility, the downside may be limited given the bullish fundamentals of decreasing supplies relative to higher demand. 

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