As Wheat Prices Keep Surging over Russia’s Invasion of Ukraine, Here’s How to Think About US Food Costs

The critical food supply-chain issue of the day is whether Russia’s invasion of Ukraine will significantly and persistently raise prices at the grocery store for U.S. consumers and around the world. While no one really knows the answer, here’s why you should be concerned.

Over the past two decades, Russia and Ukraine have become major players in world grains markets, especially for wheat. In the past two years, both were the source of about 14% of world wheat production. Ukraine supplied 4% (on average about 27 million metric tons (mmt) annually), and Russia 10% (averaging about 78 mmt yearly). The two countries have even larger shares of global wheat exports, with Ukraine supplying close to 10 % and Russia about 18% from 2019 to 2021.

The two countries are also important corn producers and exporters, though less dominant in world markets. They also produce and export other agricultural products.

It’s thus not surprising that spot and futures markets for wheat, corn and soybeans had surged by close of business on Feb. 24, the day of the invasion. The Kansas City September (harvest time) futures price for hard red wheat increased in one day by about $0.40, reaching near $9.65 a bushel.

Corn and soybeans futures prices also jumped, eliciting an immediate reaction (check out USDA’s Economic Research Service’s Market Outlook) that food prices in the United States and around the world, already much higher than a year ago, could well go even higher over the next 12 months because of Russia’s reckless warmongering.

It’s been a rollercoaster ride: by late Monday, cash market and futures prices for all three commodities had moderated and were close to their levels on the day before Russia’s invasion. Tuesday morning, after Ukraine declared all ports would be closed until the end of the invasion, Maersk and other shippers announced they would only deliver food and humanitarian aid to Russian ports. A few hours later wheat futures prices had surged to $9.72 a bushel, their highest levels since the beginning of the war. They have since continued to climb.

If wheat prices are driven significantly higher because of Russia’s war, does it mean the price of bread on a supermarket shelf in the United States will increase a lot? Not as much as most might think, because on average the farmer’s share is about 6 cents (or 6%) for every dollar spent on a loaf by a US consumer. So even a 20% rise in wheat prices would only increase the price of a $4 loaf by about 5 cents.

There is, however, another important economic consequence of the war: the surge in energy prices. If they persist, much higher oil and natural gas prices will increase the costs of shipping wheat to mills, flour to bakers, and bread and cakes to supermarket shelves. Processing costs for all food and drink products, from baby foods to bourbon, will also increase.

Higher natural gas prices will also ensure that nitrogen fertilizer prices remain at their current atypically high levels, or even increase further. This will most likely cause farmers around the globe to use less, with adverse impacts on crop yields.

The phrase “if they persist” is what creates the challenge in forecasting the impact of Russia’s war on food prices.

In a worst-case scenario, the war devastates Ukraine’s port facilities (one Ukrainian Black Sea port’s grain handling capacity has already reported damage) and prevents farmers from planting spring wheat.

Russia also faces a binding embargo on all wheat exports for the foreseeable future, and can only sell a limited amount of its grain to China, most probably about 10 mmt. While this is a substantial volume of wheat imports for China, it’s less than a third of Russia’s normal exports.

Given this scenario, wheat and other grain prices will likely remain at their current exceptionally high levels, even if harvests in other major grain-producing and exporting countries such as the U.S., Argentina, Australia, Brazil and the European Union are well above average.

If the war ends soon, however, with a cease fire and a settlement that permits grain exports from Ukraine and Russia to resume, then grain and oilseed (soybean) prices would moderate.

Nonetheless, their prices will still be much higher than a year ago because of poor harvest in major production areas such as Brazil and because of severe drought in the western United States.

So will Russia’s war cause food prices in the United States and around the globe to increase a little or a lot? The answer is that it depends on what happens over the next few days and weeks. But yes, there are very good reasons to be concerned about how this conflict will affect families here in America and around the world.