The price of wheat has been surging to multi-year highs since Russia began a special military operation in Ukraine, signaling the start of a full-blown invasion of its neighbour. The rally in the price of wheat is as a result of investors’ worry about a potential supply disruption, being that Russia is the top wheat exporter in the world, accounting for 24% of the total wheat exports in the world.
Wheat is used as the main ingredient for a lot of food items such as bread, cereals, biscuits, pastries, pasta etc. it is also converted into flour and used for several other food items.
Due to the on-going war, wheat futures trading on the Chicago Board of Trade are trading at their highest levels since the global financial crisis of 2008, in response to war in Ukraine. As of the time of this writing, the United States’ wheat futures is currently up 5.37%, currently trading $984.12 basis point, its highest since February 2008.
Unlike in 2008 when the global finance crisis caused the rally in the price of wheat, Russia’s invasion of Ukraine is the reason behind the soaring prices today as sanctions from Western nations has put a strain on Russia’s financial system and its ability to sell its goods to the world. This is because the world’s biggest container ship operators, A.P. Moeller-Maersk and Mediterranean Shipping have temporarily suspended services to Russian ports.
Russia as a major wheat supplier to Nigeria
Due to Nigeria’s dependence on Russian durum wheat, the nation is at risk of suffering from significant food shortages and uptick food inflationary pressure, due to Russia’s war against Ukraine.
- With sanctions breathing down on the Russian nation and many private companies refusing to deal with the country, the possibility of a distortion in durum wheat import from Russia is very high.
- Trade between Nigeria and Russia is currently valued at over $2 billion. Russia plays a vital role in Nigeria’s international trade as the nation is one of Nigeria’s top sources for its imported items, especially food items.
- According to the National Bureau of Statistics (NBS), Nigeria imported goods from Russia is currently valued at N813.19 billion (over $2b annualized) between January and September 2021, representing 3.7% of Nigeria’s total import in the same period.
How it affects Nigeria
- According to the Central Bank of Nigeria (CBN), durum wheat is the third most widely consumed grain in the country and is also one of Nigeria’s top imports. As you would expect, majority of the durum wheat is gotten from Russia.
- Nigeria is a huge consumer of wheat products, with its local production only accounting for just 1% of the 5 to 6 million metric tons consumed annually, while the nation relies on importation to meet local demands.
- Due to the high possibility of a distortion in Russian exports, it will in turn, cause food shortages and ultimately contribute to the food inflationary pressure we are currently seeing in Nigeria.
- Data reveals that Nigeria imported durum wheat worth over N128.1 billion in the 9-month period of 2021, while it recorded a N144.14 billion durum wheat import in the previous year.
- Being a major input in staple food consumed by Nigerians, we may experience price hikes of the government does not immediately support businesses with alternatives.
- Already, Nigeria is experiencing one of the highest food spikes in its history with prices of staple foods doubling in just under a year.
- Higher wheat prices is more likely to translate to imported inflation worsening Nigeria’s inflation condition.
Companies that may be affected
- Companies such as Flour Mills of Nigeria, Honeywell Flourmills, Nigeria Breweries, Guinness are examples of quoted companies that rely heavily on wheat as an input in the factor of production.
- If the war persists, their cost of sales could rise affecting their gross margins negatively. This could dampen earnings per share a factor in valuing their share price.
- The companies might turn to other western countries as a source of wheat imports mitigating the effect of not importing from Russia.