Analysis-Wheat buyers brace for higher costs as Russia-Ukraine war drags on

By Naveen Thukral and Sarah El Safty

SINGAPORE/DUBAI, Sept 23 (Reuters) - Global wheat buyers holding out to replenish dwindling stocks face painfully higher costs when they return to the market in the coming weeks, with world prices soaring as the Russia-Ukraine war shows no signs of abating.

Top wheat importers in Asia, the Middle East and Africa that were counting on the Black Sea region for wheat have been finding it hard to secure supplies, as attacks on vessels and port infrastructure have brought cargo movements to a near standstill since July.

The constraints have triggered a rally in prices, with benchmark Chicago futures climbing 40% from June lows to a three-and-a-half-year high and physical prices from alternative exporters surging, threatening a fresh bout of food inflation for some of the world's most vulnerable consumers.

Most global importers have held off making alternative purchases for the past few months, hoping for an agreement between Russia and Ukraine to allow grain shipments, but local supplies are running thin, especially in import-dependent Asia, traders and millers said.

Competition for cargoes is poised to intensify until the end of the year, when the Southern Hemisphere harvest kicks in, with prices set to rise further in the meantime.

"The Black Sea is an important region for shipping grains, and if buyers are not able to get grain out of this region, they have to look elsewhere for supplies, which is going to drive prices up further," said Ole Hansen, head of commodity strategy at Saxo Bank.

While some Middle Eastern and African buyers are already seeking alternatives, some importers say they have supplies that could last until November or year-end, before they need to seek larger volumes.

SHIPS STUCK

Russian wheat exports are on track to decline to around 1 million tons in September from 5 million tons last year, while Ukraine will ship about 1 million tons this month, half of last September's levels, according to Kpler estimates.

The crunch will hurt Asia the most in the near term.

"There are very few ships going in to load and whatever little is being exported out of Russia and Ukraine is going to some buyers in the Middle East and Africa. Nothing is heading to Asia," said Ishan Bhanu, an agricultural analyst at commodities data firm Kpler.

No. 2 global importer Indonesia has received only about 60,000 tons from the Black Sea this month, down from half a million tons last September, he said.

Indonesian millers are turning to other suppliers, including Argentina, and are paying around 20% to 25% more for Australian wheat than the prices at which they previously booked Black Sea cargoes, traders said.

While some millers have started booking bulk wheat cargoes from Australia and Argentina, others have turned to smaller shipments to ride out immediate tightness, traders said.

A senior executive at a Southeast Asian milling company said it has booked some containers from Australia to replace Russian and Ukrainian wheat but was not buying bulk quantities because of the high cost.

"Prices have risen quite a bit and we are not in a position to pass on the entire cost to our flour buyers," the executive said, declining to be named as they were not authorised to speak with media.

Black Sea wheat from Romania is quoted around $340 per ton C&F to Southeast Asia and Australian Premium White wheat around $345 per ton for October shipment, around 25% higher than Black Sea wheat was trading before the shipping crisis.

DWINDLING SUPPLIES

Top global buyer Egypt is scheduled to receive less than a tenth of the volume it received from Russia and Ukraine in the September-to-October period last year. But it has some leeway.

"Importers cannot wait forever but can wait for quite a long time as the harvests in the Middle East and North Africa have just arrived, giving breathing space but of course not for the full season," said one European trader.

In the first half of September, Egypt's wheat imports dropped to 143,870 tons, from 876,139 tons a year ago, when Russia and Ukraine accounted for a bulk of the shipments, according to official data.

Egypt is turning to France and other European suppliers, diversifying away from Ukraine and Russia, Minister of Supply Sherif Farouk said on Sunday.

However, some Egyptian buyers are still shying away from alternatives, as millers prefer wheat varieties they are accustomed to processing and have domestic supplies to draw on, Cairo-based traders said.

Many mills in Egypt are operating at 30% of capacity, said Hesham Soliman, an Alexandria-based trader, as they hold out for prices that could drop as much as one-fifth if Black Sea shipping is restored.

"They are all waiting to see Russia and Ukraine sit down. The market is paranoid that if this happens then the market will suddenly go down $50 or $60 per ton."

(Reporting by Naveen Thukral and Sarah El Safty; additional reporting by Gus Trompiz in Paris, Michael Hogan in Hamburg and Mohamed Ezz in Cairo; Editing by Tony Munroe and Sonali Paul)