Source: Bloomberg and Wilmington Trust Investment Advisor, Inc. calculations. July price increase as of July 28th.
The Black Sea Grain deal was initially signed for 120 days starting on July 22, 2022, and renewed for another 120 day on November 18, 2022. On March 17, 2023, and May 18, 2023, Russia only agreed to an extension for 60 days—and on July 17, 2023, announced that it will pull out of the deal. The surprise announcement had an immediate impact on wheat prices which increased 10%, from $235/mt in the second week of July to $262/mt by month end. On a y/y basis, wheat inflation mostly continued to decline since the start of the deal, reaching a low of -45% at the end of May 2023. In the immediate aftermath of the Russian pullout, the y/y price decline slowed to -13%. According to the International Monetary Fund, global grain prices could rise by as much as 15% if the Black Sea Initiative is not renewed.
There are international efforts under way to revive the deal, but it remains highly uncertain. It is unclear if this is a real escalation or just a negotiation strategy on Russia’s part to have the European Union accept its demands. Russia is demanding that a major Russian agricultural bank—Rosselkhozbank—be reconnected to the SWIFT international payment network enabling large financial transactions related to trade. However, Russia recently bombarded several grain silos in Ukrainian port cities including Odesa, which was part of the Black Sea Initiative. The impact of the end of the deal may also be dampened by relying on other routes for Ukrainian exports—including by road, rail, and the river Danube—which tend be more expensive.
Spillover from international grain prices to domestic inflation
Most global economies were already experiencing high inflation in the wake of COVID, and the Ukraine war further accelerated inflation to unprecedented levels. Because commodity markets are global and food prices are a major driver of overall inflation, a rise in global prices spills over to domestic inflation (See Figure 2). Although food is a smaller component of overall consumer price indices (CPI)—with richer countries tending to spend a smaller share of expenditure on food—the high volatility of food prices can be a significant driver of overall inflation. For example, for the United States, although food represents only 13.4% of the weight in the Consumer Price Index, the correlation between overall inflation and food inflation (since 2001) is very high at 0.71.
As shown in Figure 2, overall and food inflation appear to move together and, also, with the change in wheat prices, although with a lag. For the U.S. in particular, the more recent drop in food inflation and wheat prices seems to be highly correlated. However, the recent food inflation in Japan does not seem to be impacted by wheat prices—partly explained
Figure 2: Overall inflation, food inflation, and change in wheat prices