The wheat market has been torn between two extreme driving principles, supply and demand. Late last week, further sabre rattling coming out of the Kremlin underlined how precariously balanced the grain corridor deal really is. Reserve mobilisation, the threat of nuclear warfare and the realisation of a protracted war is building a considerable premium back into the market.

Late last week however, ag commodities started to feel the pinch of economic headwinds.  Global markets were a sea of red as investors fled to safe haven assets (i.e. the USD) as talk of recession spread.  The threat of recession raises the possibility of demand destruction as end users tighten their belts.

It makes for an interesting dynamic. The possibility of a supply squeeze should the Black Sea corridor fail, versus a slowing of economic growth and stagnating demand.  Crude Oil is a great barometer for economic ‘health’ and for the past six months, the writing has been on the wall, with crude peaking at US$110/barrel to now being below US$80.  This is all despite (or maybe because of) the energy sector, particularly natural gas hitting all time highs, piling up pressure on recessionary fears.

The ag commodities, corn and beans, are under pressure also because of improving harvest pace in the US but also a surging USD which is making US exports more expensive. 

How this plays out for Australian grain will be interesting to watch.  A weaker AUD and plummeting ocean freight rates (figure 1) should make our product reach further end users.  However, if the US is struggling to build an export program outside of traditional inelastic demand, it may weigh heavily on futures.

Ultimately, the major influence on prices will be the Black Sea.  Russia is confirmed to have a monster wheat crop of 100mmt courtesy of excellent spring wheat yields.  Their export program is picking up pace albeit from a low base.  Since the Kremlin announced a ‘mobilisation of reservists’, some 300kmt conscripts are expected to be sent to the front line over the next couple of weeks.  It makes you wonder how the Russian new season crop will get planted.  Ukrainian exports have surpassed 5mmt in the past 6 weeks, but I can’t help thinking that the corridor is on borrowed time.  Russia is again targeting the port of Odessa, making the logistics of loading grain and sailing a very hazardous occupation.

The week ahead….

This weekend it is expected that Moscow will ‘celebrate’ the annexation of four Ukrainian oblasts (territories) in what would likely be seen as an inflammatory move.  This comes hot on the heels of suspected sabotage of the Nordstream pipeline in the Baltic Sea, deepening the energy and political crisis enveloping Europe.  Good luck navigating this.

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Data sources: Reuters, SONAR, SovEcon

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