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Wheat has become much more expensive since the start of the war in Ukraine. How is the price of wheat created and what do stock exchanges have to do with it?
For many years, the price of a ton of wheat ranged around 200 euros. Since the start of the war in Ukraine, it has doubled to about 400 euros. This doubling is a shock, especially to people in poorer countries, who spend a large portion of their income on food.
Only about a quarter of the global 785 million tonne wheat crop enters the international market. So far most are sold, processed and eaten (eg in the form of bread) in the countries where it is produced. Prices and quality can vary greatly depending on the region.
Big scholarships
However, when it comes to wheat, we usually talk about a world market price that is created on separate stock exchanges. “We have two major stock exchanges in the world – the CBOT (Chicago Board of Trade) in Chicago and the Euronext in Paris,” said Wolfgang Sabel, managing director of Kaack Terminhandel in Cloppenburg, a service provider specializing in agricultural trading.
“These stock exchanges are basically the barometer of prices under state supervision. They are regulated and work with defined standards and principles. Only supply and demand decide the price. ”
Standardization means that quantity and quality are precisely defined. An example: 50 tons of bread wheat originating from the EU, has a minimum of 11 percent protein, a maximum of 15 percent moisture. Only this standardization allows global trade.
For grain producers, traders and processors, this price set on the stock exchange is like the wholesale price, says Sabel. So a kind of instruction that everyone uses as a guide. Deviations are possible in individual cases, depending on the situation in the country.
Price assurance
In addition to price, commodity exchanges have another important function: they provide producers, processors, and traders with the opportunity to secure their calculations.
Sabel cites the example of a supermarket chain requesting an offer from a wheat mill to ship a larger quantity of flour in 500g packages in September. “Of course, you still do not know what the price of wheat will be in September. “But you can make a contract for the future.”
Futures contracts are contracts entered into on major stock exchanges for something that will happen in the future. In our example, the mill provides the required quantity of grain in September at a fixed price and makes its calculation for the supply in the supermarket chain on this basis.
In September, the mill then delivers the grain from the local farmers shop and pays the current price. Let’s say it’s about 400 euros per tonne. However, the mill has signed a contract earlier for 300 euros per ton. That is, he pays 100 euros per ton more than planned and receives a loan of 100 euros per ton through the stock exchange account. In the end there is a price of 300 euros per ton, on which the mill has based its calculations. In principle, it is possible to cover prices for the next two years, says Sabel.
Basis of calculations
In this way farmers are also protected from price fluctuations. “If a farmer has secured a price of 300 euros for future production and the price goes up to 400 – then he earns more money by selling it. But he has to pay the difference through his exchange account. “On the other hand, if the price of wheat falls to 200, the loss will be compensated through the stock exchange account”, explains Sabel.
The basis of all transactions is the wheat that is currently available. But price protection works simply through stock accounts, without having a real grain shipment after each contract. “The stock market only balances financial values without physically interfering with the cycle,” says Wolfgang Sabel.
Sabel says all of his clients are growers, traders or processors of wheat. But this is not a prerequisite for inclusion in commodity futures exchanges. There are also pure speculators who derive their profits from the differences between expected and actual price developments. And the so-called arbitrage try to take advantage of regional price differences, for example on different stock exchanges.
No improvement is seen on the horizon
The current price increases of more than 400 euros per tonne of wheat are due to the fact that the two warring parties, Russia and Ukraine, together produce about a third of the wheat that is exported to the world market, ie exported – about 60 million from 200 million tons. “The world can not give up the wheat of Ukraine and Russia, the quantities are simply too large,” says Sabel.
In this situation, everything can affect the price and lead to strong fluctuations: Daily reports on the war in Ukraine as well as forecasts for the next harvest in the US.
The situation is particularly dramatic because many of the wheat buyers are developing and underdeveloped countries, including many countries in Africa. “In these countries, people spend 60-80 percent of their disposable income on food,” says Sabel. “If bread is one of the most important foods and suddenly it is twice as expensive, because the world market price has risen from 200 to 400 euros per ton, then this has an impact.”
The German Farmers’ Association expects wheat prices to remain high despite the war in Ukraine. Prices have risen even further due to the Corona pandemic. “We have a shortage of fertilizers and extremely high fertilizer prices,” said Joachim Rukwied, president of the Association. There are also problems with the supply chain, there is also a lack of spare parts for many machines. “We can not expect a relatively rapid increase in production.”
Broker Wolfgang Sabel has a similar view. “At least until 2023, wheat will remain expensive.” / DW
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