{"id":37396,"date":"2023-07-18T17:08:21","date_gmt":"2023-07-18T21:08:21","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/why-russias-decision-to-halt-grain-deal-is-stirring-global-inflation-worries\/"},"modified":"2023-07-18T17:08:23","modified_gmt":"2023-07-18T21:08:23","slug":"why-russias-decision-to-halt-grain-deal-is-stirring-global-inflation-worries","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=37396","title":{"rendered":"Why Russia\u2019s decision to halt grain deal is stirring global inflation worries"},"content":{"rendered":"
Russia\u2019s decision Monday to suspend the Black Sea Grain Initiative led to a short-lived rally in the wheat and corn markets, but concerns over global supplies of key commodities from Russia and Ukraine are set to climb, contributing to uncertainty over global inflation.<\/p>\n
Wheat futures had jumped alongside rising prices for corn and soybeans early Monday after Russia said it was pulling out of the international agreement. The deal was brokered by the United Nations and Turkey in July of last year to supply global markets with food and fertilizer in the wake of the Russia-Ukraine war. The latest 60-day renewal of the agreement was due to expire Monday. <\/p>\n
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\u201cIt is a surprise that Russia is not renewing the deal because Russia exports nearly three times more wheat than Ukraine,\u201d Sal Gilbertie, chief executive officer at Teucrium Trading, told MarketWatch.<\/p>\n
Kremlin spokesman Dmitry Peskov told reporters on Monday that the Black Sea agreements were no longer in effect as the part of the deal that concerned Russia had not yet been fulfilled, according to the Russian state news agency TASS. <\/p>\n
As soon as the Russian part of the deal is fulfilled, the Russia side will \u201cimmediately return to the implementation of this deal,\u201d Peskov said, according to TASS, noting that the decision was announced before the most recent attack on the Crimean Bridge. <\/p>\n
Following the news, wheat futures climbed by nearly 6% to a session high from the day\u2019s lowest level, but have since moved down from Friday\u2019s settlement. Early Monday afternoon, soft red winter wheat for September delivery \n WU23, \n +2.37%<\/bg-quote><\/p>\n
W00, \n +2.37%<\/bg-quote> \n traded in Chicago was down 8 \u00bc cents, or nearly 1.3%, at $6.53 \u00bc a bushel after trading as high as $6.89 \u00bc.<\/p>\n
Most-active December corn futures \n CZ23, \n +5.24%<\/bg-quote><\/p>\n
C00, \n +5.24%<\/bg-quote> \n fell 6 \u00be cents, or 1.3%, to $5.07 a bushel, while November soybeans \n SX23, \n +1.20%<\/bg-quote><\/p>\n
S00, \n +1.20%<\/bg-quote> \n tacked on 4 cents, or 0.3%, to $13.74 \u00be a bushel.<\/p>\n
Russia\u2019s decision is \u201cimportant as both Russia and Ukraine are major corn and wheat exporters,\u201d and both export other goods as well, said David Maloni, president of food service supply chain consulting firm Datum FS. <\/p>\n
The issue may be resolved in the coming days, he said. If not, \u201cit would be more disruptive abroad than in the U.S.\u201d\u00a0<\/p>\n
\u2018Black Swan\u2019 possibilities<\/h2>\n
The market had been considering the potential that Russia would suspend the grain deal. Since the agreement was reached a year ago, Moscow has repeatedly threatened to end it unless the West facilitated its own exports of food and fertilizers.<\/p>\n
The futures market anticipates events and that is exactly what it has done \u2014 prices rallied up to the actual cancellation of the agreement, and has then sold off in Monday afternoon dealings, said Stephen Nicholson, RaboResearch global grains and oilseeds sector strategist.<\/p>\n
Still, by not renewing the deal, Russia is \u201cpotentially opening itself up to retaliatory attacks on its export infrastructure or merchant ships by Ukraine and others, which could upend the export of literally all commodities out of the Black Sea including oil and fertilizer,\u201d said Teucrium\u2019s Gilbertie. That\u2019s a \u201cmajor gamble on Russia\u2019s part to extract concessions from the West, but withdrawal from the deal opens up an array of Black Swan possibilities for global commodity markets.\u201d<\/p>\n
If Ukraine cannot export its products via the Black Sea, Ukraine or someone else could \u201cpotentially begin to target Russian ships in the Black Sea in a bid to disrupt Russian exports,\u201d he said. <\/p>\n
Given the fact that Russia is the world\u2019s second largest oil exporter and that almost half of its oil exports are seaborne via the Black Sea, \u201cany spillover of hostilities into the trade waters of the Black Sea could have major implications for grains, oil, oil products, and fertilizer markets \u2014 which could impact commodity markets and the global economy itself,\u201d said Gilbertie.<\/p>\n
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\n \u201c<\/span>\u201cAny spillover of hostilities into the trade waters of the Black Sea could have major implications for grains, oil, oil products, and fertilizer markets \u2014 which could impact commodity markets and the global economy itself.\u201d \u201d<\/span>\n <\/p>\n
\n \u2014 Sal Gilbertie, Teucrium Trading<\/span> \n <\/small><\/p><\/div>\n<\/p><\/div>\n
The July World Agricultural Supply and Demand report from the U.S. Department of Agriculture show significant export estimates for 2022\/2023 crop year, with world wheat exports at 45.5 metric tons for Russia, and at 16.8 million metric tons for Ukraine. <\/p>\n
Still, \u201cone doesn\u2019t have to be a child of the Cold War to \u201cimmediately doubt anything and everything to come out of the Kremlin,\u201d said Darin Newsom, Barchart senior market analyst. He said he\u2019s \u201clong argued that anything of value held by Ukraine at Black Sea ports has been stolen by Russia and shipped off as its own.\u201d<\/p>\n
The question now is \u201cif the world can actually be so naive as to have believed the situation was going to change in Ukraine\u2019s favor, with all those metric tons of grain suddenly becoming available again.\u201d Maybe some in the industry believed that, but \u201cnot the majority of those who know better.\u201d<\/p>\n
Newsom said he expects plenty of grain supplies due to the El Ni\u00f1o climate pattern, both globally and domestically. In June, the National Oceanic and Atmospheric Administration declared the arrival of the climate phenomenon, which is marked by warmer-than-average sea surface temperatures in the central and eastern Pacific Ocean near the equator.<\/p>\n
Read:<\/strong> El Ni\u00f1o has potential to disrupt the outlook for sugar, rice and other consumer staples<\/p>\n
Newsom doesn\u2019t believe that what Russia is saying changes global grain supply and demand. It\u2019s \u201cpossible the U.S. sees an uptick in export demand, though there is no evidence of it to this point,\u201d he said. He\u2019s not looking for a \u201cdramatic tightening of supplies globally.\u201d<\/p>\n
\u2018Muted\u2019 effect for now<\/h2>\n
The Black Sea Grain Initiative has been a \u201chuge benefit\u201d to Ukraine, Russia and the world, said Nicholson. <\/p>\n
After Russia\u2019s invasion of Ukraine in February 2022, exports nearly ground to a halt but have rebounded significantly as the grain agreement \u201cstabilized prices for all buyers in the world,\u201d he said.<\/p>\n
Russia has been the \u201cmain benefactor\u201d by shipping 52 million metric tons of grains for the 2022\/2023 crop year as of May, versus 35.6 million metric tons a year ago, said Nicholson, who provided the chart below. He also said Ukraine has shipped 45.8 million metric tons through May, versus 47.8 million metric tons for the same period in the last crop year.<\/p>\n
<\/p>\n<\/p>\n
<\/div>\n<\/figure><\/div>\n
Keep in mind that Ukraine had made most of their shipments before the war started and it has a smaller crop this year, along with more interior logistics issues, said Nicholson. The numbers in the charts are of total grain exports, including some through the Danube River and northern European ports, he said.<\/p>\n
Despite the grain deal suspension, Nicholson said potential upside price risk will be \u201cmuted and delayed.\u201d Buyers around the world were \u201cprepared for this suspension by developing new supply chains over the past year,\u201d and he believes that buyers built up stocks with \u201chopes of riding out\u201d this storm.<\/p>\n
Eventually, buyers will need to \u201ccome back to the market to buy again,\u201d so while futures prices may be selling off a bit Monday, you can bet that cash markets are \u201cbeing bid up.\u201d<\/p>\n
Overall, the news adds \u201cone more uncertainty to central banks and governments as they try to bring down inflation,\u201d Nicholson said.<\/p>\n<\/p><\/div>\n