Investors are right to get excited about wheat prices. But they should also remember that upward movement won’t last for ever.

Russian President Vladimir Putin’s latest missile attacks on Ukraine certainly touched a raw market nerve.

Chicago wheat futures came just 0.5 cents from going limit up on Monday, before tempering gains a little bit to 6.6%.

And there was a strong case for injecting extra risk premium into prices.

Although the missile strikes are not reported to have damaged infrastructure sufficient to snarl-up Ukraine’s grain exports, the threat to trade is significant nonetheless, with the UN-brokered deal to create a safe passage for shipments due to expire next month.

This means that Kyiv and Moscow will need to reach fresh agreement, a task which will only become more tricky if tensions boil over.

Risk vs price

The danger isn’t just to Ukraine’s grain shipments.

Russia’s exports are in the firing line too, given the uncertainty that the conflict, with the soaring regional cargo rates and Western sanctions it has brought, is instilling among importers.

As Amis said, “despite a current discount of 12% of Russian wheat to the next closest competitor,” French origin, “some importers clearly show a preference for low-risk/high-price origins rather than the high-risk/low-price Russian execution.

“Higher competitiveness,” let alone a huge 100m-tonne harvest, “has not resulted in higher Russian exports.”

Indeed, Russia’s wheat shipments in the July-to-September period, the first quarter of 2022-23, totalled 9.90m tonnes on SovEcon estimates – a drop of 1.85m tonnes year on year.

Not much choice

Nor is the world spoiled for choice when it comes to alternative suppliers.

Russia and Ukraine have been expected to meet 25% of world export demand in 2022-23 on US Department of Agriculture estimates.

The other major exporters (Argentina, Australia, Canada, the European Union and the US) haven’t got much wheat going spare, being expected to end the season with stocks of 34.9m tonnes, the lowest in 15 years.

Compared with world consumption, these inventories equate to just 4.4%, the tightest since the Soviet Union was still alive and keeping Russia and Ukraine out of world trade, and warranting high prices to limit drawdown further.

Premium limits

Nonetheless, there are limits to the premium that wheat warrants.

It appears likely that Russia and Ukraine will agree some kind of grain deal, even if on modified terms. Russia is already enough of a pariah without getting into the bad books of major importers in the likes of Africa and Asia too.

Furthermore, a back-up of wheat would hardly serve Russia well, meaning valuable commerce lost, and pressure gained on domestic prices which would risk adding farmers to the list of the country’s malcontents.

‘Tends to overshoot’

So world growers should remember to price at least some of their wheat.

As Amis also said, “a geopolitically-driven grain market tends to overshoot, especially as it typically reacts to headlines and rumours that increase perceived threats, risk premiums and uncertainty”.

For sellers, the best time to sell is during that overshoot.

Of course, that is difficult to spot except in hindsight. But if it does involve reacting to headlines and rumours, well, Monday and its aftermath is the kind of period they should be looking out for.