Wheat Surges as Ukraine Plans to Limit Exports

06:57PM Aug 02, 2018
( )

(Bloomberg) --

Wheat prices surged to a three-year high as Ukraine said it will limit exports of milling wheat after a drought wrecked European crops.

The world’s fifth-largest wheat exporter plans to sign a memorandum with traders to set limits for grain exports for the 2018-19 season, according to a statement from the Agriculture Ministry posted on Facebook. Prices jumped in Paris and the U.S., with benchmark futures rallying as much as 6.2 percent in Chicago.

“We plan to set limits for milling-wheat export for the mid-term period in the beginning of the marketing season,” the ministry said. “Securing the domestic market and the stability of prices for key food are an absolute priority.”

In a later statement, the Agriculture Ministry sought to clarify its position, explaining that it’s not discussing “strict limits” for exports and will discuss projected shipment volumes with traders.

Ukraine has traditionally enforced its wheat export limits informally, pressuring grain traders to ship certain volumes, rather than formally issuing a legal document. The effect, however, has been roughly the same, with Ukrainian grain sales capped.

Smaller crops in major shippers are boosting the attractiveness of Ukrainian grain, the ministry said. Extreme heat and dryness means output in the European Union will be the second-lowest in a decade, while production in top shipper Russia will fall for the first time in six years. Dry weather is also threatening crops in Australia, another key supplier.

Ukraine’s move brings back memories of 2010-11 export restrictions imposed by the country and Russia after a heatwave and drought ruined crops. That sent global grain prices sharply higher.

"We have seen this from Ukraine before," said Matt Ammermann, a commodity risk manager at INTL FCStone Inc. "The market may panic, fearing the same from Russia."

Wheat futures in Chicago initially soared, touching the highest for a most-active contract since July 2015, and then gave back most of the advance. Futures for September delivery were up 1.4 percent to $5.6625 a bushel as of 11:59 a.m. local time.

In Paris, the December contract jumped as much as 5.3 percent, before also paring some of the gain.

Wheat Supply

Ukraine’s milling-wheat supplies total about 11 million metric tons, with domestic demand pegged at about 5 million tons, according to the Agriculture Ministry.

The export restrictions are likely to hit the business of the four storied agricultural trading houses that dominate global grain flows: Archer-Daniels-Midland Co., Bunge Ltd., Cargill Inc. and Louis Dreyfus Co. Other traders like Glencore Plc and big domestic houses such as Nibulon and Kernel Holding SA are also likely to be affected.

Wheat prices are important for emerging markets including Egypt and Indonesia that rely heavily on imports, as rising wholesale prices feed into local inflation. The world saw food riots in as many as 60 nations in Africa, Asia and the Middle East during the 2007-08 and 2010-11 food price spikes.

"The Ukrainian announcement is adding further food for the bulls," said Kieran Walsh, a broker at ICAP Plc in London. "Apart from Canada, much of the world looks in difficulty."

Copyright 2018, Bloomberg