Why Wheat Price Soars

Ukraine is known as “the breadbasket of Europe”. It is one of the major countries exporting wheat in the world, and its land is super fertile, with more than a quarter of the world’s chernozem or black soil, and is reported that “Ukraine can feed the world”! [1]

Agricultural land area in Ukraine

The total land area of ​​Ukraine is 60.3 million hectares, and the agricultural land area is as high as 41.4 million hectares, that is, the agricultural land accounts for almost 70% of the country’s land area, and the arable land is 32.7 million hectares, which is approximately equal to the total area of ​​Italy, and the arable land accounts for 54% of the country’s land area. (Figure 1).

Figure 1 Agricultural land and arable land in Ukraine. Source: Nieuwsbericht [2]

In other words, more than half of Ukraine’s land is arable land, while the population is only 44.13 million, the per capita farmland area reaches 0.9 hectares. Furthermore, as the farmland trading market was only opened in 2021, there is still a large amount of production capacity of farmland in Ukraine that has not been fully utilized [2], Ukraine can play a pivotal role in the world’s future food supply.

Agricultural production and benefits in Ukraine

Taking wheat as an example, Figure 2 shows the average wheat yield of the Ukrainian states in the past five years (2006–2020). The eastern region of Ukraine (the dark green states in the picture) is an agricultural area with a higher wheat yield, and the output of each state can reach 1.5–2.3 million metric tons [3]. In fact, in 2020, Ukraine’s total wheat harvest in the whole country reached 24 million tons, of which exports accounted for about 18 million tons, i.e. exports accounted for three-quarters of the output, making it the fifth largest exporter of wheat in the world. Ukraine is also the world’s top exporter in many other agricultural products such as corn , rye and vegetable oil [6].

Figure 2 Wheat production in Ukraine (five-year average production 2016–2020). Source: USDA [3]

According to data from S&P Global, Ukraine’s exports of corn and wheat in 2021 reached 27.2 million tons and 21.2 million tons, accounting for 12.8% and 10.5% of the world’s total exports [7].

According to the OECD[4] estimates of the grain yields in 2030, Ukraine’s output is 5 tons of wheat per hectare of farmland (Figure 3), which is a country with high yield, and since there is still a lot of uncultivated farmland available, Ukraine has a considerable potential for increasing production, if the Russia invasion could be stopped.

Figure 3 Estimated yields of wheat, rice, maize, and beans for Australia, the United States, the world, Canada, Ukraine, and New Zealand in 2030. Source: OECD [4]

Grain price soaring

However, the invasion is a major blow to Ukraine’s agriculture. If the war continues to cover the wheat harvest season in July and August, it will have a significant impact on global wheat exports and increase the risk of rising food prices. In fact, as early as January this year, many analysts pointed out that Russia may invade Ukraine, the reason is related to agricultural land [5, 6], of which Brian Czech [5]’s economic analysis is insightful, the following is an excerpt from the original texts:

“He wants the agricultural power of those perfectly positioned, well-drained, ‘black gold’ soils, now and in the future. If he can steal Ukraine, he’ll have the currency of currencies (a lot more of it, that is ), the best possible hedge against inflation, and adaptive capacity in the face of climate change.” [5]

Alex Smith [6], in his January article, analyzed the impact of Russia’s invasion of Ukraine on world food prices. Since Russia invaded Ukraine on February 24, the international wheat price has surged from about $800/Bu to more than $1,200/Bu, and has recently fallen to $998/Bu (Figure 4). However, if the war continues, it will be difficult for grain and oil prices to fall back to the pre-war level.

Figure 4 International wheat prices Apr 1, 2021 — Mar 31, 2022. Source: Trading Economics

References:
[1] Leshchenko, R. (2022) Ukraine can feed the world, Altantic Council, 4 March. https://www.atlanticcouncil.org/blogs/ukrainealert/ukraine-can-feed-the-world/

[2] Agroberichten Buitenland (2021) Ukraine: agricultural land market, Nieuwsbericht, 01–07–2021, https://www.agroberichtenbuitenland.nl/actueel/nieuws/2021/07/01/ukraine-land-market#:~ :text=Expected%20price%3A%20is%20about%20%24%202%2C500,moratorium%20%2D%20up%20to%2010%25.

[3] USDA (2022) Foreign Agriculture Services, https://ipad.fas.usda.gov/rssiws/al/up_cropprod.aspx

[4] OECD (2022) Crop Production, OECD Data. https://data.oecd.org/agroutput/crop-production.htm

[5] Czech, B. (2022) Putin the Practical Wants Ukraine Grain, Casse Steady State Economy, January 27, https://steadystate.org/putin-the-practical-wants-ukraine-grain/

[6] Smith, A. (2022) A Russia-Ukraine War Could Ripple Across Africa and Asia — Beware of food price spikes and revolutions if Ukrainian grain deliveries are disrupted, January 22. https://foreignpolicy.com/2022/01 /22/russia-ukraine-war-grain-exports-africa-asia/

[7] Maciejewska, A. & Skrzypek, K. (2022) Ukraine agriculture exports -what is at stake in the light of invasion? IHS Markit, S&P Global, March 7. https://ihsmarkit.com/research-analysis/ ukraine-agriculture-exports-what-is-at-stake.html?fbclid=IwAR0skFoCEY_0hLUb7b_8YOd5kYDHgh3MlAkIgmmogTz-J-yi50AObRtDNjs