How is the price of grain determined?

For many years the price of one ton of wheat was about 200 euros. Since the beginning of the war in Ukraine, it has doubled to about 400 euros. This double is a friend, especially for people in poorer countries who spend much of their food income.

Only about a quarter of the world's 785 million-ton wheat harvest appears on the international market. So far, most are sold, processed, and eaten (e.g. In the form of bread in which it is produced. Prices and quality can vary greatly depending on the region.

The Great Stock Exchanges

However, when it comes to wheat, it is usually about a price of the world market set up in special stock exchanges. “We have two major stock exchanges in the world - CBOT (Chicago Board of Trade) in Chicago and Euronext in Paris”, says Wolfgang Sabel, director of the Kaack Terminhandel in Cloppenburg, a service provider specialising in the trade of agricultural products.

These scholarships are essentially the barometer of prices under state supervision. They are regulated and work on established standards and principles. Only offers and demands decide the price. ”

Standardization means that quantity and quality are precisely defined. One example: 50 tonnes of wheat from EU origin, has minimum 11 per cent protein, maximum 15 per cent moisture. This standardization alone allows global trade.

For producers, merchants and wheat processors, the price set in the stock market is like the price of sale in large amounts, Sabel says. So a kind of instruction that everyone uses as a guide. The deliveries are possible in individual cases, depending on the situation in the country.

Price Safety

In addition to the price, stock exchanges for goods in the future have another important role: they offer producers, processors and businessmen the opportunity to ensure their calculations.

Sabel cites the example of a chain of supermarkets that requires an offer from a wheat mill for sending a larger quantity of flour into a 500g package in September. “Of course, you do not yet know what the price of wheat will be in September. But you can make a contract for the future”, Sabel says.

Future contracts are contracts linked to major stock exchanges for something that will happen in the future. In our example, the mill provides the required amount of grain in September at a fixed price and makes its estimate of the market supply on this basis.

In September, the mill then hands over the wheat from the farmers' local store and pays the current price. Let's say it's around 400 euros per tonne. However, the mill has signed early contracts for 300 euros per tonne. It means, it pays 100 euros per tonne more than was planned and gets a 100-euro loan per tonne through the account on the stock exchange. Finally, there is a price of 300 euros per tonne, on which the mill has based its calculations. In principle, it is possible to cover prices up to the next two years, Sabel says.

The Basis of Calculations

Farmers are thus protected from price swings. “If a farmer has secured a price of 300 euros for future production and the price goes up to 400 then he earns more money by selling it. But he has to pay the difference through his exchange account. On the other hand, if the price of wheat falls to 200, the loss will be compensated through the account on stock exchange”, Sabel explains.

The basis of all transactions is wheat that is currently available. But the protection of prices works simply through stock accounts, without having a real delivery of wheat after any contract. “Bursa only balances financial values without physically interfering with the” cycle, Wolfgang Sabel says.

Sabel says that all his clients are growers, merchants, or wheat makers. But this is not a prerequisite for getting involved in goods future scholarships. There are also pure speculators that draw their profits from differences between expected and current price developments. And so-called arbitrations try to take advantage of regional price differences, for example in different stock exchanges.

No improvement on the horizon is seen

Current price increases of more than 400 euros per tonne of wheat are due to the fact that the two sides in war -- Russia and Ukraine -- together produce about a third of the wheat extracted on the world market, which exports about 60 million out of 200 million tons. “Bota cannot give up wheat from Ukraine and Russia, amounts are simply too large,” says Sabel.

In this situation, everything can affect the price and lead to severe fluctuations: Daily reports of the war in Ukraine, as well as predictions of future US crops.

The situation is especially dramatic because many of the wheat buyers are developing and underdeveloped countries, including many countries in Africa. “in these countries, people spend 60-80 per cent of their available food income”, Sabel says. If the bread is one of the most important foods and is suddenly twice as expensive, because the world market price has increased from 200 to 400 euros per tonne, then this has an impact”.

The German Farmers' Association expects wheat prices to remain high, despite the war in Ukraine. Prices have also increased because of the Corona pandemic. “We have lack of garbage and extremely high garbage prices,” says Association President Joachim Rukwied. There are also problems with the supply chain, and there is a shortage of spare parts for many machines. “We cannot expect a relatively rapid growth in production. ”

Mediator Wolfgang Sabel has a similar view. At least by 2023, wheat will remain expensive”. / DW