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Wheat Prices Spiked as Russia's Failed Coup Attempt Created Uncertainty

The recent political crisis in Russia triggered by Wagner's failed coup attempt has raised concerns about the stability of the world's largest wheat exporter. Russia accounts for 20% of global exports, mainly to the Middle East, Africa, and Asia. Wheat prices surged in response to the uncertainty, reaching their highest level since February.

This has added to the global flood inflation that supply chain disruptions, higher energy costs, and strong demand amid the pandemic recovery have driven.

Disclaimer: This article was written on June 26, but I had been too busy with other analyses in the Discord group for premium members. I still decide to publish this anyways

Complex situation

The coup attempt may affect Putin's credibility in his own country and his willingness to work with other nations, especially Ukraine. Until July 2022, Ukraine can export its grain through Russia's ports in the Black Sea under an agreement between the two countries.

The deal is important for Ukraine, as it lets them sell more wheat to other countries and saves them transportation expenses on shipping. The 2019 agreement is controversial because it was signed while the two nations conflicted Crimea and eastern Ukraine.

The UN warns that the agreement may not continue because the involved parties lack communication and trust. If the agreement expires without a replacement, Ukraine could face difficult challenges in finding alternative routes and markets for its grain, which could disrupt the global supply and push prices higher.

The attempted coup could affect Russia's wheat production and exports. The weather has been good this year, and more land has been used, so there's expected to be a record crop of about 85 million tonnes.

However, the political turmoil could pose some risks to the crop's quality and quantity and the export sector's logistics and infrastructure. For example, there could be delays or disruptions in harvesting, transporting, storing, and loading the grain due to security issues, labor shortages, power outages, or sanctions.

There could also be changes in Russia's export policy, such as imposing quotas, tariffs, or bans to protect domestic supplies or exert geopolitical leverage.

The reaction of other wheat producers and consumers to the situation in Russia.

The recent surge in wheat prices may prompt other prominent exporters like the US, Canada, Australia, and Argentina to boost their production and shipment volumes, capitalizing on this market opportunity.

Despite the increasing demand for their product, farmers may encounter difficulties due to various factors like unpredictable weather, strict environmental laws, and trade restrictions. Meanwhile, major importers like China, Iran, Egypt, and Turkey may opt to source their supplies from multiple locations, stock up on inventory, or lessen their consumption to ensure a steady supply.

Although individuals may desire to achieve certain goals, obstacles such as financial limitations, currency devaluation, or social upheaval can prevent them from doing so.

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Summary

Recent events in Russia have further complicated the already tight and intricate global wheat market, causing increased uncertainty and volatility. This development carries significant implications for food inflation, particularly for low-income countries and households that allocate a sizable portion of their income toward food expenses.

Although supply chains may recover from previous shocks, and demand may slow down due to increased prices or slower growth, there is still a possibility that inflation expectations may become deeply rooted, leading to wage-price spirals.