European Grain Prices Set to Double Amid Heat Waves and War

Europe's grain prices are expected to double in the next six months due to a combination of heat waves and military conflicts. The continent is facing a significant harvest shortfall, with Germany, France, and the UK all experiencing below-average yields. In Germany, total grain production is expected to reach about 37.4 million tons, down 7.3 percent from last year, while winter wheat is expected to fall by 10 percent year-on-year.

The heat waves since late May have already hit the crop, and three heat waves in a row are unprecedented. The Federal Ministry of Agriculture has announced that Germany's agriculture minister called the situation a 'crisis of national proportions', a phrase rarely used for a harvest rather than a natural disaster. In France, the damage is concentrated in corn, with the harvest expected to shrink by more than a third.

The war in Ukraine has also opened a second front of pressure on the grain market. Ukrainian drones hit grain export terminals in the Russian port of Novorossiysk, damaging three facilities that handled a total of about 25 million tons of Russian exports annually. Russia's wheat exports in July fell by 30 percent from last year to 1.5 million tons.

The European Union is turning to South America for supplies, but Argentina, which was expected to be a leading supplier, is now facing a smaller crop area and a harvest estimated to be 23 percent lower. This means that Europe will have to compete with Brazil for the same shrinking surplus, something it had not had to do in many decades.

The economic research suggests that grain price shocks translate into social and political pressure primarily through producers' income rather than through prices paid by consumers. The current situation is a convergence of three separate shocks: the contraction of the European crop, the blockade of many Black Sea ports, and the retreat of the Argentine surplus just as Brazil needs record imports.