How the Russia-Ukraine Conflict is Threatening the Crude & Wheat Markets

The notion that the Russia-Ukraine conflict poses a threat to the global energy supply seems to be a given. But what some people are probably not expecting is the impact it may have on another “energy” supply: breakfast cereal and any other food types requiring wheat.

Europe’s bread basket in flames: First off, Russia, is the world’s top wheat exporter. It’s followed by the US, Canada, France, and then Ukraine. With two of the top five exporters engaged in a military conflict, supplies of a commodity whose price has already risen to a 10-year high are about to undergo even further disruptions.

According to Alan Holland, CEO of sourcing firm Keelvar told CNBC, “Even though harvesting season is still a few months away, a prolonged conflict would create bread shortages [and increase consumer prices] this fall.”

A five-year plunge: US Department of Agriculture data reports shows that global wheat supplies fell to a 5-year low last year, as poor growing conditions in Europe’s Northern Hemisphere over the last few years catapulted wheat prices sky high. The Russia-Ukraine conflict is likely to further disrupt the supply situation, adding to the inflationary pressures on food across the globe.

Breakfast in America: Kellogg’s CFO, Amit Banati, told analysts in last month’s conference call that rising wheat costs (among other key ingredients) are beginning to put pressure on the iconic cereal maker. Fellow cereal behemoth General Mills warned of an acute shortage in materials to produce dough, pizza, and other snacks, though they didn’t mention specific commodities.

Americans are already feeling the erosive pressure of inflation at a 40-year high. Should the current conflict in Eastern Europe prolong agricultural export disruptions, we can arguably expect inflation to tick higher.

It isn’t looking any better for Crude prices: Traders who went long crude oil are probably celebrating the fact that the “black gold” exceeded $100 per barrel for the first time in nearly a decade. But any sense of celebration was probably muted as soon as they hit the gas station. Overall energy prices are up 27% in January year over year. Not fun.

Don’t forget how one spills into the other: Remember that energy costs also affects food production and transportation. Yes, that includes harvesters, trucks, planes, and ships. As another “input cost,” increased energy costs stemming from the Russia-Ukraine conflict will likely further bump up inflated food prices. So in a way, you’re getting a double whammy.

What to look out for: While grain prices are expected to rise up 20% or 30%, according to Capital Economics’ economist Caroline Bain, economists are worried that the current sanctions on Russia may push the price of crude oil to $125 per barrel, which won’t bode well for the US Economy.

 

 

 

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