Prairie farmers are feeling nervous and it's not just about the weather. It's the news: The soybean crop in Brazil, the drought in Australia and now the endless bulletins about the political turmoil in Ukraine. The last one is the wild card, because Ukraine is a big grain producer and a leading exporter. It is ranked third in global market share in corn and sixth in wheat production. In fact, it is the main supplier of corn, wheat and rapeseed to Europe. On Wednesday, Chicago wheat futures soared to a 10-month high.
Only a month ago, the U.S. Department of Agriculture was predicting a slump in grain prices. Aggressive planting after the record corn and wheat prices of two years ago has prompted the USDA's optimism about record crops and its chief economist reckoned in February that the 2014 wheat crop would sell at an average price of $5.30 per bushel. Since then, events have taken a different turn. Continuing cold and dry weather in the southern plains, shipping problems in Canada and Russia's annexation of Crimea, have all contributed to a rise in prices. On the Chicago Board of Trade, wheat for May delivery reached $7.19 on Wednesday, reflecting anxiety about the conditions for crop germination in the prairies, as well as Europe's dependence on the flow of food from Black Sea ports.
President Putin is playing his diplomatic game in Ukraine just as that country emerges as a global food supplier. Ukraine has for generations been a food producer for Russia, but it has much greater potential. Ukraine's weather and soil closely resemble the northern corn belt in the U.S., but Ukraine's farmers still lack the sophistication, equipment and infrastructure to achieve North American crop yields. Ukraine's farmers achieve only 60 per cent of the output per acre of their North American rivals. However, the country is already making huge gains, with corn production rising 17 per cent over the last five years, and it is no surprise to learn that U.S. agribusiness multinationals have targeted Ukraine for investment.
E.I. du Pont de Nemours & Co. said in February that disruption to seed sales in Ukraine would affect its earnings. Cargill Inc. has storage silos and and a vegetable oil plant in Ukraine. In January, shrugging off the brewing civil unrest, the Minneapolis grain trader agreed to pay $200-million (U.S.) for a 5 per cent interest in an agribusiness firm based in Kiev. UkrLandFarming PLC has 1.6 million acres producing corn, wheat, barley, sugar beet and sunflowers. Meanwhile, China has in recent years been making extensive overtures to Ukraine, seeking to lease farmland and offering loans in exchange for long-term feed supplies for China's expanding livestock industry.
The memory of the droughts that led to the 2012 grain price explosion is still very much alive in agricultural markets and among governments. Shortages have been made worse by hoarding behaviour, notably in Russia and India which both sought to protect domestic supplies by banning exports. The availability of real-time information about crops helps farmers to react swiftly to prices, but at the same time, it encourages both official panic, and the raising of official barriers to trade that can transform a shortage into hunger. Into this mix, we now find that power politics and historic diplomatic rivalries are injecting a new danger.
Ukraine was a breadbasket for Russia, and has become one for Europe, too. What is now becoming clear is that the importance of Ukraine's ports is not the Russian warships that skulk in Crimea, but the grain terminals and bulk carriers that bring food out of the Black Sea into the Mediterranean, through the Suez Canal into the Middle East and beyond. Ukraine's grain exports make it as vital a cog in the global food machine as the Canadian prairies, and it has now become a pawn in a nasty political game. No wonder the wheat price is rising.