MARKETS:
Wheat’s Black Sea asymmetry
Wheat prices have waned since mid-November. Some have discussed the potential halt to the Russia-Ukraine war as a factor. We are sceptical that a halt to the war is a substantial negative influence on wheat prices.
MARKETS: Wheat’s Black Sea asymmetry
Wheat prices have waned since mid-November. We think much of the rise before then was investors exiting short positions. And prices have waned since, at least partially, because that wave of buying has subsided. Other factors perhaps also matter. Some have discussed the potential halt to the Russia-Ukraine war as a factor. We are sceptical that a halt to the war is a substantial negative influence on wheat prices. Overall, we expect wheat prices to settle into a range. And for investor positions to be modest.
Negotiations to halt the Russia-Ukraine War continue. We think there are good reasons to be sceptical that these negotiations will pause or halt the war. Vlad the Bad likely has little interest in peace because post-war Russia will be a difficult, if not dangerous, place for him. Should these negotiations break down, then the risk of price spikes would be renewed. Nonetheless, thinking through the implications of a halt to the war is worthwhile.
Our overall view is that the Russia-Ukraine War is an asymmetric event risk for wheat prices. The risk is that the war could, inadvertently, stop wheat exports for a material period. The most obvious example is the destruction of, or damage to, logistics infrastructure. This infrastructure is a military target. Therefore, the possibility of collateral damage to nearby rail, storage or loading facilities for grain is real. We saw a brief example several weeks ago. Ukraine attacked oil loading facilities at Novorossiysk, also a major Russian grain export hub. Wheat prices spiked briefly on that news. And then quickly receded when it became clear that grain export facilities could still function. In our view, the market would respond to such events rather than anticipate them via an ongoing premium to prices. This risk is too specific and too idiosyncratic. Most of the time, the war is not impeding wheat exports from either Ukraine or Russia. Therefore, we do not think an agreement to halt the war will materially liberate wheat flows.
An important counterargument was earlier investor positioning in wheat futures. Investor positioning across grains and oilseeds had been largely bearish. Oddly, though, some investors had accumulated a very large long position in SRW wheat futures by end-October. That position might have been designed to capture price spikes generated by the war. Were that the case, then a halt to war would remove the rationale for that long position, prompting selling and lower prices.
Now that the CoT data is catching up, we can see how investor positions evolved. Investors sold a big chunk of their long position by 11 Nov. That selling, though, was absorbed by other investors buying back short positions. A smaller investor long position is thus a less likely source of downward pressure on wheat prices. Investors’ long and short positions shrank, and so became more neutral, during the rally.
