Why wheat futures prices are dropping despite Russian attacks

European wheat futures are trading a touch higher Friday following an attack on Ukrainian grain storage facilities by Russia on Wednesday, but are about to close the week on a lower note.

This week-on-week decline seems counterintuitive since Ukraine is one of the largest global producers of wheat and even after 18 months of conflict is still a major exporter. The reason for this, however, has likely nothing to do with Ukraine.

Earlier in July grain prices in Europe and in the US hit a five-month high after Russia tore up an agreement brokered by the UN and Turkey to allow grain shipping from Black Sea ports. The idea behind it was to avoid wheat shortages in Europe, and more importantly, in the far more price sensitive and wheat dependent North Africa countries.

Since then, European prices have been declining and only showed marginal signs of life this week after an attack on the Ukrainian grain storage facilities on the Danube River.

The Danube was brought in as an alternative export artery to Europe, bypassing the Black Sea issues, but brought with it some capacity and cost problems. Danube ports are not equipped to take as much grain as Black Sea ports and the river transport is costlier than sea shipping, adding to the price of exported grain. Half of Ukrainian grain is now being exported via Poland and Romania, but Europe has issues with transporting this on to final destinations.

In a strange twist, one container ship that has been stranded in the port of Odessa for over a year was allowed to leave via a temporary corridor established for merchant shipping.

MATIF September milling wheat (no 2) ticked up 0.98% on Friday to EUR228, while the December contract traded up 1.04% at EUR238. The last trading day for the September contract is 10 September.

Apart from the uptick on Friday, wheat prices have not responded very strongly recently because the northern hemisphere is in the middle of the harvest. This is a relatively calm period for the market and the full supply situation will become clear once the harvest is finished.

Also, while the exports of grain from Ukraine are not heavily related to what is going on in China, the fact that the Financial Times ran three negative news pieces on China’s economy on Friday is evidence of the increasingly negative overall market sentiment and risk aversion.

Over the last few days several Chinese macroeconomic numbers came in below estimates, including retail sales and industrial production, while unemployment inched higher, prompting the country’s central bank to cut interest rates.

Significantly, the government in Beijing stopped reporting youth unemployment data which rose in June to 21%, signalling concerns that worse is yet to come.

China is a major buyer of almost half of all global commodities, particularly metals, as well as semi finished and final products. The reverberations of these numbers will be felt for months to come within global commodities markets. In that environment it will be hard for any commodities to move much higher, including grains, despite supportive fundamentals.

Tags: Europe, US, wheat, futures, grain storage, Ukraine, Black Sea ports, Russia, China, exports, grain, prices