What scenario will lead to a 20%+ spike in wheat prices?

Andrey Sizov Q&A with WSJ/Dow Jones


Andrey Sizov, head of SovEcon, recently spoke with Will Horner from WSJ/DJ about Russia-West-Ukraine tensions and their implications for the grain market

Q&A: Russia-Ukraine Conflict Threatens Global Wheat Supplies 

By Will Horner, Dow Jones 

Tensions between Russia and Ukraine are shining a spotlight on the major role that both nations play in global grain markets and raising fears that a conflict could have a serious impact on global supplies and international prices. 

Together, both nations account for almost 30% of the world’s wheat exports, much of which travels via the Black Sea which both Ukraine and Russia border. Analysts are concerned that disruption to those exports could send prices sharply higher. Both Ukraine and Russia are major suppliers to North African nations such as Egypt. Such nations often depend on imports to keep their populations fed and bread prices down. 

Andrey Sizov, managing director of SovEcon, a Russian research firm focusing on Black Sea grains, spoke with the Wall Street Journal about what a conflict could mean for global grain markets. Here are edited excerpts: 

Q: Could you start by quantifying the significance of the Black Sea grains trade for global grain markets? 

A: So it’s one of the few fast-growing grain export hubs. The other one would be South America, or Brazil more precisely. In terms of its importance, it is the number one export hub for wheat, Russia is the number one wheat exporter, Ukraine is the number three wheat exporter, and a very important corn exporting region too.

Ukraine is the number four corn exporter and corn production is growing rapidly in the country. Ukraine is getting close to Argentina as a corn exporter because its production and exports are growing fast while in Argentina things have more or less stagnated. I should also probably add that Ukraine is a very important competitor for U.S. corn in the Chinese corn market, which is a huge market. 

Q: What are the important grain export routes in the region to be aware of and how could they conceivably be disrupted by a conflict? 

A: The Azov Sea, a shallow sea, is very important for Russian grain exports which go via the Kerch Strait to the Black Sea. Russia has many terminals there. Ukraine also has some terminals there but they are not really the important ones. So it is not a big story but the Azov Sea is currently controlled by Russia and if there is a limited conflict those [Ukrainian] terminals could be affected potentially and that could lead to increased prices. 

The major Ukrainian ports around Odesa and Mykolaiv, which can easily handle 50 million metric tons of grains a year, are very far from Russia. So, potentially for [disruption] to happen there it will mean a full-scale war. Which would be a disaster scenario and is extremely unlikely. 

A lot will depend, if we are talking about disaster scenarios, on what Turkey will do. Because everything that goes out from the Black Sea goes through the Bosphorus, another straight, and it is controlled by Turkey, which is a member of NATO. 

Q: You have said that wheat prices could rise around 20% to 25% if there was a conflict between Russia and Ukraine. What kind of scenario are you imagining when you predict such a price jump? 

A: It would require some kind of military conflict, but only a limited one. Why 20% you might ask, why not 50% or 100%? In late February 2014, when Russian troops indeed appeared in Crimea and later Crimea was annexed by Russia, the wheat market rallied by around 20%. If we see some military activity around the [separtist-held regions of Donetsk and Luhansk], which are supported by Russia–but not a large-scale invasion–that would mean a similar 20% rally. But I should also add that in reality in 2014, we didn’t see any actual disruptions of grain flows out of the region despite there being Russian troops on Ukrainian territory in Crimea.

My basic scenario is that nothing will happen. I would say there is a 90% to 95% probability of that. A bad scenario would see some limited military activity at and around Russia’s border and in this case, the market could rally by 20% or more, but this scenario implies there would be no actual disruptions of grain flows from the region. Actual disruption could really only happen in the case of a really large-scale war. The probability of that I think is negligible.

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