Cereal prices since the Russian invasion of Ukraine

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Just a few weeks ago, the news was filled with stories of how the war in Ukraine was causing a dramatic global spike in the prices of wheat and other crops. Recent developments remind us that what goes up usually comes down.

Movements in grain futures markets have been spectacular. Wheat for September 2022 delivery closed at $7.84 a bushel on Feb. 16, a week before the Russian invasion. On May 17, that same contract was trading at $12.79 a bushel.

Traders feared that a sharp reduction in Ukraine’s exports could limit global supplies at a time when global grain stocks were already relatively low. A number of countries were trying to obtain grain from other exporters. India has announced restrictions on wheat exports in an effort to contain domestic prices.

These concerns were reasonable, but the magnitude of some of the price changes was surprising. Ukraine is a major grain exporter, but it accounts for a relatively small share of world production. I thought that the price increase needed to spread global supplies must be much lower than that actually observed.

The war in Ukraine has not only contributed to the rise in prices. For example, drought in the Plains states was expected to limit winter wheat production, and excessive rains in North Dakota reduced spring plantings.

Still, it didn’t quite seem to match – even given harvest concerns, the swings in wheat prices seemed to mismatch the magnitude of the supply disruptions.

Then, just as suddenly as prices rose, the story changed. By July 1, the September wheat contract had fallen back to $8.46 a bushel, down about a third from the peak.

So what happened? I’m not sure I have a definitive answer. Yes, some of the pessimism about the 2022 U.S. and global wheat crop has eased. Yes, there was reason to hope that more Ukrainian wheat would reach world markets than initially feared. Russia had a good harvest with good export prospects, despite Western sanctions.

However, these changes alone do not seem sufficient to explain such a significant drop in prices. The same story was also true for corn and other commodities – most of the price increase that occurred after the Russian invasion was wiped out in just a few weeks.

A possible and troubling explanation for what we have observed is that the market may be anticipating that a recession will weaken demand for agricultural products. Stock market declines provide one of many indicators that investors are less optimistic about the economy than they once were.

Lower agricultural commodity prices will not necessarily lead to an immediate sharp reduction in consumer food price inflation. Farm produce is only a small fraction of the retail value of a loaf of bread or a pound of meat, so even large changes in prices at the farm level tend to translate into 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 are worried 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.

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