Ukraine unrest gets too much credit for higher wheat prices

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Regular readers of the U.S. Wheat Associates (USW) Weekly Price Report have seen a month-long uptick in wheat futures prices. Each week, many headlines pointed to political instability in Ukraine as a key factor in the run-up.

There is little doubt that the market was factoring in some concern over the political situation in a country that captured 6 percent of the world wheat market in 2013/14. But the primary fuel for a 15 percent increase in the Kansas City Board of Trade (KCBT) May hard red winter (HRW) wheat contract in just 13 trading days include real fears about droughts around the globe, potential freeze damage in the southern U.S. plains and position changes by the big index funds.

USW believes speculation and uncertainty are driving the market reaction about Ukraine. The facts seem to tell the story - at least for now.

All signs still point to normal export operations in Ukraine. The Ukrainian Agriculture Ministry released its monthly export report on March 19 showing no indication that grain shipments suffered in the last four weeks.

Moreover, journalists from Ukraine report regular operations at export terminals on Ukraine's mainland and the Crimean peninsula. The Ministry reported exports of 108,500 metric tons in March, bringing total exports since July to 7.49 million metric tons (MMT).

Wheat export volume from Ukraine is typically lower this time of year as old crop supplies diminish. Adding in June 2013 exports of 129,000 MT reported by the Global Trade Atlas, Ukraine has already shipped more than 76 percent of the 10.0 MMT total USDA expects the country to export in 2013/14 (June-May). It is also important to note that a large percentage of Ukraine's wheat exports are destined for feed use.

The location of Ukrainian ports puts grain logistics relatively far away from the current political situation. The Ukrainian agriculture ministry recently reported that grain from Crimea only account for about 7 percent of Ukraine's total grain exports.

That number was even lower in February, when grain exports through Crimean ports were just 3.6 percent of the total. Furthermore, the country's biggest grain port of Odessa is about 180 km (112 miles) from the Crimea region, while the other major ports, Yuzhniy and Nikolaev, are more than 145 km (90 miles) away.

The agriculture ministry also reported that other ports have more than enough capacity to handle shipment diversions from Crimea if necessary.

The political turmoil has not hindered old crop wheat sales so far and should not significantly disrupt or decrease 2014 new crop production.

Financial fallout from the crisis could make spring planting difficult, but that represents only 5 percent of Ukraine's crop, on average, so the majority of the crop will be ready for harvest in June or July. Crimea is not a major wheat-producing region so any lost planted area there would have little impact on global supplies.

There have been some reports that traders and customers are hesitant to enter into new contracts for Ukrainian wheat given the political and financial uncertainty. If it persists, a perception of higher risk could affect the global supply and demand balance, particularly into the 2014/15 marketing year.

Global supplies are already tight due to record-breaking consumption four of the past six years. As it is in the United States, the real concern for the new wheat crop in Ukraine and southern Russia is drought.

Once more, we are reminded that in the world wheat market, precipitation is always more important than politics.

Regardless of what happens, the U.S. wheat store is always open. U.S. wheat farmers have always produced enough wheat to supply the domestic market and still make half their crop available to the world and the U.S. wheat supply chain is always ready to help customers with both planned and unforeseen demands.

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