Speculation in global grain markets

As the war increased uncetainty over global grain supplies, investors rushed to commodity markets, with important consequences for food insecurity around the world.

Russia’s invasion of Ukraine is affecting all of us in one way or another. High inflation and the loss of purchasing power have extended across the global economy, and while the surge in energy prices is receiving most of the attention, global grain prices also increased substantially as a result of the invasion.

FAO Food Price Index

(2014-2016 = 100)

Since the beginning of the invasion, Russia has blocked shipping from the Black Sea, which Ukraine uses to export its grain to the rest of the world. Both Russia and Ukraine are among the world’s top 5 producers of wheat, for which grain-importing countries are having a hard time securing supply from alternative sources. While this disruption is partly responsible for the surge in prices, we must turn to futures markets to get the full story.

Futures markets allow commercial traders of commodities such as wheat, to protect themselves against unexpected price fluctuations. They do so by agreeing to deliver a certain amount of wheat at a fixed price in the future. On the other side of this trade are usually speculators, who seek to benefit by betting long for prices to rise and short for prices to drop. Traditional speculators are beneficial to futures markets because they provide liquidity and take on the risk that commercial traders seek to get rid of.

A third type of agent in futures markets is the index speculator, which usually includes large hedge funds and banks. Index speculators are attracted to commodities in high-inflation environments, as traditional investments become less profitable. While the number of speculators is small, they take on very large positions, for which their investment strategies can create strong fluctuations in the price of commodities.

As the possibility of a confrontation between Russia and Ukraine became apparent, and with inflation rates in the US and Europe at the highest they have been in years, index speculators rushed to wheat futures markets to take on long positions.

Index traders increased their long positions

Chicago Board of Trade - Soft Wheat

Institutional investors are using Russia’s invasion of Ukraine to stock on wheat with the intention of selling it later on at a higher price. As more investor try to ride this wave, international wheat prices are soaring, with dire consequences for global food insecurity. Current food prices are at a 10-year high and people in food-importing areas of Africa and the Middle East are simply unable to afford the grains to meet their caloric needs.

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