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Inflation and famine warnings as wheat prices jump on Russia threats, US drought

Published 20/07/2023, 09:11
© Reuters.  Inflation and famine warnings as wheat prices jump on Russia threats, US drought
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Proactive Investors - A surge in wheat prices on the back of a Russian warning over shipping is leading to alarm bells ringing about food price inflation in developed countries and potential famine elsewhere.

Wheat prices climbed another 2.7% on Thursday morning, having jumped 8.5% the day before after Russia’s defence ministry said that ships heading to Ukrainian ports from today would be considered as potentially carrying military cargo.

Today's rise put the price of wheat on track for a sixth consecutive daily increase, with the Ukraine blockage coinciding with a severe dry spell in key growing regions in the United States and recent warnings about the likelihood of an El Niño weather event in the second half.

Economists at Deutsche Bank (ETR:DBKGn) noted that other agricultural goods were also affected, with corn rising 3.5% and soybeans 1% too.

"That follows the news earlier in the week that Russia was pulling out of the Black Sea grain deal, which had enabled the continued export of millions of tonnes of food from Ukraine," says Deutsche's Henry Allen.

Susannah Streeter, head of money and markets at Hargreaves Lansdown (LON:HRGV), adds: "Just as painful food inflation was beginning to ease, Russian attacks on grain storage facilities in Ukraine risk causing another spike in costs of staple ingredients."

With missiles having been fired at infrastructure after Moscow’s deal pull-out, she says: "Although it's highly disappointing for Western shoppers, dealing with prices increases at the tills, this move is treacherous for countries grappling with severe drought, particularly in the horn of Africa, where millions of people are at risk of acute food insecurity and famine.

"Cutting off Europe’s breadbasket region yet again could hardly come at a worse time as unusually hot weather has descended."

The escalating crisis in Europe is coinciding with the drought conditions in US agriculture strongholds such as Kansas, leading to expectations of lower yields for the current harvest.

US wheat stocks for 2023/24 are projected to come in at a 16-year low.

"This highly unwelcome collision of factors has pushed up US wheat futures prices by more than 13% since Tuesday, adding to concerns that food prices will remain very sticky," says Streeter.

Kansas, for example, which is usually responsible for producing around a quarter of the US winter wheat crop, has been hit by the worst drought conditions for over a decade.

Data from the US Drought Monitor showed almost 8% of the state was gripped by "exceptional drought", 19% in "severe drought" and 30% in "extreme drought", with only 3.9% of the entire state currently drought-free.

Read more on Proactive Investors UK

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