Study details Ukraine war’s wheat market impact

As the second anniversary of Russia’s invasion of Ukraine draws near, a recently published research paper on the long-term impact the war has had on global wheat prices and market responses paints a relatively optimistic picture.

The study, which was co-authored by researchers from the University of Illinois and Texas Tech University, found that although prices initially spiked in the first several months after the invasion, they have sharply declined since then as other wheat-producing countries have compensated for the reduced output and exports from Ukraine.

William Ridley, assistant professor in the Department of Agriculture and Consumer Economics at Illinois and co-author of the study said he, like many others, believed in the weeks after the war began that prices would soar and remain relatively high for the foreseeable future. But the prices quickly retreated when it became apparent that other wheat exporters could fill the void. He noted that since the war began 23 months ago, the price of wheat on the global market has only increased by 2%, after surging 27% higher in the opening weeks of the conflict mainly due to speculative buying.

“I think one of the key takeaways from our study is that, yes, there were effects on prices and, yes, there were effects on availability,” Ridley told World Grain. “But at the end of the day it was not as bad as initially feared. What we do in our work is show that markets are going to readjust; trade is going to reallocate. When you take Ukraine wheat off the market, other suppliers are going to step in, and that’s what happened.

“Other exporters, like the US, Australia and Canada, came online (to compensate for Ukraine’s reduced exports), but also after initially not being able to export much wheat out of the Black Sea ports, that issue has been largely resolved.”

After blockading Ukraine exports on the Black Sea during the first five months of the war, Russia agreed to allow grain exports from Ukraine through the Black Sea Grain Initiative, brokered by the United Nations and Turkey. The agreement lasted about a year until Russia withdrew last July and began bombing Ukrainian grain assets at Black Sea ports and on the Danube River. Ukraine has countered by developing a new export corridor on the Black Sea following neighbouring countries’ territorial waters to reach the Bosphorus Strait. Ukrainian ships then enter Ukrainian territorial waters from Romanian waters near the mouth of the Danube River.

For the 2023-24 season, which runs from July through June, the US Department of Agriculture’s Foreign Agricultural Service forecasts an 8% year-on-year increase in corn exports, to 29.2 million tonnes, a 3% increase in wheat exports, to 17.7 million tonnes, a 22% increase in barley exports, to 3.3 million tonnes and a nearly 10-fold increase in rye exports to 170,000 tonnes. However, those totals are well below pre-invasion exports for Ukraine, which traditionally has been a top 10 producer and exporter of wheat and corn.

“Because of the war, we estimate that Ukraine wheat producers have experienced a $1.4 billion loss in producer surplus,” Ridley said.

While much of the focus has been on the war’s impact on Ukrainian grain exports, the report also highlights the production difficulties the country’s wheat farmers have encountered. It said the eastern and southern areas of Ukraine, where much of the country’s wheat production takes place, were the targets of destructive and persistent bombardments by the Russian military in the first months of the invasion. Last June, the destruction of the Kahovka Dam in southern Ukraine caused disastrous flooding in Kherson.

“In a war zone, it’s hard grow and harvest wheat,” Ridley said. “The destruction of that dam has been a major calamity. It is the source for irrigation in that part of the country.”

Throughout the conflict, Russia has been accused of weaponizing food by trying to become an even larger supplier of wheat to countries that have traditionally relied on imports from Ukraine. These countries include Pakistan, which imported 49% of its wheat from Ukraine prior to the conflict, as well as Lebanon (62%) and Egypt (23%). The co-authors noted that because wheat accounts for around 20% of global caloric intake, “these disruptions have potentially dire implications for food insecurity.”

“I think they wanted to do that, but it wasn’t as effective as they’d hoped,” Ridley said, referring to Russia’s desire to weaponize grain and food. “However, I don’t think they’ve abandoned that as a tool that they’re trying to use to get countries on their side. There are places around the world – particularly in Africa and Southeast Asia – that are big wheat importers, and they don’t really care who they buy it from. And if Russia is able to guarantee a steady supply, Russia is going to use that as a lever.”

While the study provides insight on the conflict’s influence on the global wheat market to this point, Ridley cautions that there’s no way to know the future impact if the war drags on for years.

“If there’s some sort of protracted stalemate, which at this point looks like the most likely outcome, I think production is going to remain disrupted in the southeast part of Ukraine,” he said. “Exports are currently getting out but who knows what the future holds?

“One particularly ominous prospect would be if Russia takes over parts of Ukraine or, God forbid, the whole country. My sense is that Russia is trying to corner the market for a lot of commodities, wheat among them. They appear to be looking to expand their market power and ability to manipulate prices and use food as a geopolitical tool in some sense.”

The co-authors said their findings have important implications for international policy towards food and agriculture, as “our results support the notion that military conflicts between countries should, to the extent possible, not be allowed to impede agricultural production and exports, in order to ensure that farmers in war-torn countries and consumers globally should not suffer needlessly.”

“Multilateral policies ensuring a stable supply of food and removing Russia’s ability to exploit hunger and food insecurity as a geopolitical tool could be effective means to combat their war effort,” Ridley said.

Tags: output, Market, study, Danube River, Ukraine, Russia, exports, grain, prices, wheat, Black Sea