2022 Theme: Global Grain Lead Food Prices Higher

Are we at the onset of a seismic shift in global food prices and also global food production?

Will we look back on the catastrophic war in Ukraine not just as a brutal assault on an innocent country and seismic shift in the global political order but also a dramatic and damaging reorganization of global food supply?

As the number of times we used the word "global" above indicates, these are vital questions and not just for investors.


We have mentioned the challenge that a war in Ukraine would pose for grain prices a few times.

At the outset, we typically framed it as side effect of rising energy.

  • The idea was that rising energy costs = higher fertilizer prices and very quickly these will feed through to higher prices at the checkout counter for many people.

The impact is largely for poorer countries where food makes up a larger percentage of the spending and especially those that do not produce all that they consume.

This is still true! It is still happening and a huge problem.

Now, however, it is very possible that we are on the cusp of something very different and far more problematic.

  • The inescapable fact is that Russia is the world's largest grain exporter. Ukraine is the world's 3rd (Canada is No.2).

Little noticed before now, but the famous black earth of the Ukrainian-Russian steppe plays a key role in global food supplies. Ukraine was "the breadbasket of Russia" during the Soviet era and these days it is increasingly the supplier of cheap foodstuffs to the developing world.

See here:

  • Wheat is likely the most important Ukrainian grain. Globally, the country was the 5th largest exporter but away from it absolute size, it might be the countries that are more important.

Egypt, Indonesia, Turkey, Bangladesh etc. are all big purchasers of Ukrainian wheat. These and other "emerging" countries have large and young populations and cannot produce enough food on their own.

Ukraine may not be a superpower in the "sexy" strategic sense like semiconductor chips or oil or rare earth minerals but it quietly and cheaply feeds a lot of the world's young and developing population.

This is actually rather impressive when you think about it. It was also likely underappreciated by nearly everyone until very, very recently.

Now that war has arrived there are actually two distinct problems. One around price, the other around substitution.

  1. The problem for the likes of Egypt and Indonesia is they must likely replace this grain. It is one thing to be confronted with higher prices, it is a whole other issue to actually replace hundreds of tons of actual grain especially when Russia is the marginal provider of extra supply.

  2. The other issue is simply around prices. As the price of grains rocket higher there will be a greater number of food poor countries and desperate people confronted with higher cost of everyday staples.

These countries will be scrambling to replace Ukrainian supply and also they will be nervous about social stability with prices spiralling upwards and the threat of price gouging and general unrest following in lockstep.

Add it all up and the situation is now very different matter than our earlier argument around the consequences of farmers confronted with higher fertilizer costs.

  1. The issue isn't just that prices will rise or that many millions and millions of people could be tipped into food insecurity.

  2. Nor is that this desperation will likely have political repercussions. The Arab Spring memorably occurred at another time of high inflation and especially high food costs.

  3. The big takeaway is that Russian oil and gas are still flowing. And they are for sale - at a discount. The supply isn't yet that constrained even if the market is still - for now - very tight.

  4. That isn't the case for Ukrainian wheat and other agricultural commodities. The ports on the Black Sea that it ships from are being shelled, shipping is at a standstill and the available stocks are under great threat.

It is important to remember that Ukraine ships wheat year round. Production may be seasonal but people's hunger is not.

  • Thus, the disruption does not have to wait for this summer's crop. The problem has already begun.

And yes, the growing season begins in only a few weeks. If the war continues it will be understandably very difficult for Ukrainian farmers to fertilize and tend their already planted fields.

It may be even harder to get that wheat to market let alone onto a ship. This very weekend Russia has been busily preparing to bomb Odessa's shipping facilities.

This combination of uncertainty and negative news is having a predictable impact on global agricultural commodity prices.

Here is the Wheat Futures chart:

Finally, the big news Friday was that Russia was considering halting the export of fertilizer. This sent additional shock waves through markets and underlined that Russia will likely take measures to respond to Western sanctions that do not involve Ukraine itself.

Russia does have some options.

It is little known or discussed but Putin's regime has been limiting wheat exports for years and playing a form of "wheat diplomacy" favoritism at the same time. This will pile on pressure on countries desperate for cheap food supply. What will Putin's price be for cheap grain?

The problem isn't necessarily that Russia will engage in this again. They obviously will. The concern is that other countries will follow and we begin a cycle of "beggar-thy-neighbor" protectionist policies that piles pressure onto commodity markets and add a dose of inefficiency and a pinch of politicization to global food supply at precisely the wrong time.

Diplomats may need to be hard at work and not just over the conflict in Ukraine.


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