For many years, the price of a ton of wheat was roughly 200 euros. After the start of the Ukrainian War, this price doubled to 400 euros. This increase has been a major blow to people who spend most of their income on food, especially in poor countries.
A quarter of the world’s wheat harvest, which corresponds to approximately 785 million tons, is exported to other countries. Most of it is sold in the country where it is produced, processed and consumed by turning into products such as bread. Price and quality also differ from region to region.
TWO BIG EXCHANGES
On the other hand, wheat has a world market price and this price is determined in private exchanges. Wolfgang Sabel, the manager of Kaack Alivre Trading Company, which provides expert services in the trading of agricultural products on the stock market, explains how the price is determined:
“There are two important options exchanges in the world. The Chicago Board of Trade (CBOT) in Chicago and the Euronext in Paris. In principle, these exchanges are price barometers under the supervision of the government. They are regulated here and work according to certain standards and principles. Only supply and demand determine the price. ”
Standardization means full expression of quantity and quality. To give an example: 50 tons of bread wheat originating from the European Union contains a minimum of 11 percent protein and a maximum of 15 percent moisture. However, thanks to the determination of these standards, trade becomes possible around the world.
For manufacturers, traders and processors, the price set by these exchanges is a kind of wholesale price and a measure for the actors in the market. However, deviations from this scale are possible depending on the situation and location.
PRICE-SETTING AND ASSURANCE
In addition to price setting, options exchanges perform another important function. It offers producers, processors and traders the opportunity to trade on the account they originally set up. Sabel exemplifies this with the flour delivered to the supermarket chain. Let’s say this supermarket chain made a deal with a wheat mill in September to buy large quantities of flour in 500 gram packages. “Of course, it is not known how the wheat price will be in September from today, but a futures contract can be made today,” says Sabel.
Futures or futures contracts are agreements for a future event on major options exchanges. In our example, the mill fixes a certain price for the required amount of wheat and can calculate on this basis and submit an offer to the supermarket chain.
In September, the mill procures wheat from the local farmer and pays whatever the current price is that day. Let’s say the price is 400 euro per ton. Değirmen, on the other hand, had previously made a forward contract over 300 euros per ton. In other words, it will have to pay 100 euros more per ton than planned. In this case, he can get a loan of 100 euros per ton from his account in the stock market. As a result, the price of 300 euros per ton on which the mill has established the cost calculation remains constant.
CALCULATION BASIS
In this way, farmers insure themselves against price fluctuations. “If a farmer secures a price of 300 euros by looking at the next harvest, and the price rises to 400 euros, he earns more on the sale, but he has to pay it to his account on the stock market. If the price of wheat drops to 200, he balances this loss from his stock market account.”
The basis of all these commercial transactions is wheat, which is available in real terms. However, price assurance is provided through the accounts on the stock market. Wolfgang Sabel says, “The stock market stabilizes the financial values here, it does not physically interfere with the buying and selling of wheat.”
Sabel states that all of his customers are either producers, sellers or processors of wheat. However, there is no such condition to be in the options exchange. There are speculators here too. They earn their income from the difference between expected and actual prices. Arbitrageurs, for example, profit from regional price differences in different exchanges.
HEALING IS NOT EXPECTED
The fact that the wheat price exceeds 400 euros per ton is due to the fact that Russia and Ukraine, which are at war, produce one-third of the wheat exported in the world. Approximately 60 million tons of approximately 200 million tons are produced by these two countries. “The world cannot give up on Ukrainian and Russian wheat, the quantities are huge,” says Sabel.
In this case, everything can affect the price and cause high price fluctuations. This includes many factors, from news from warring regions in Ukraine to predictions of what the next harvest will be like in the United States.
The fact that many of the buyers of wheat are developing or on the verge of development, especially in Africa, makes the situation more dramatic. “People in these countries spend between 60 and 80 percent of their income on food. If bread is among the most important foodstuffs and suddenly doubles in price, there will be consequences,” says Sabel.
The German Farmers Union predicts that the price of wheat will continue to be high regardless of the Ukraine War. Prices had skyrocketed while the coronavirus pandemic was still going on. “We have a shortage of fertilizers and fertilizer prices are exorbitantly high,” says Union President Joachim Rukwied. Added to this is the problems experienced in the supply chain, many people have difficulty in finding spare parts. “We can’t expect a relatively rapid increase in production,” Rukwied says. Sabel agrees: “Wheat will remain expensive until 2023.”