As week 2 of the Russian invasion of Ukraine plays out, we’re beginning to get a sense of how commodity markets and energy prices will be affected. As with any conflict, the destruction of roads, bridges and most important to Ukraine, boats, will delay and cancel shipments. Ports have been a major driver of supply chain and logistic issues. For now, it appears that commodity trading is not part of the SWIFT sanctions. As we discussed last week, Ukraine is the breadbasket of Europe and responsible for a lot of the world’s grain and oilseeds.
Ports
Ukraine has remained firm that ports are to remain closed during the conflict. With 82% of Ukraine’s grain being shipped out of six ports on the Black Sea, this means a large portion of Ukraine’s 2021 crop set for export is unable to leave.
There have also been reports of a few vessels being hit by missiles. Insurance costs are at record highs, leaving grain held up in ports. Grain traders are struggling to get financing for bushels stored in the country and some banks have restricted the financing of commodity movements within Ukraine. Some banks have pulled out completely. Markets will be watching for force majeures – when suppliers are unable to fulfil contracts due to extreme circumstances.
Planting season nears
The other big question is: Will Ukrainian farmers plant? There is no clear answer on this. We have a few more weeks until planting season but farmers have a lot on their mind. First, there are attacks in highly productive areas. Farmers near the frontlines are unlikely to plant anything if the crop is going to be destroyed or over fear of conflict occurring while carrying out field work. There is also a shortage of farmers. Many men have been sent to the frontlines to fight, leaving their farms behind. While Ukrainian farm wives may be able to assist in the planting, women and children have been fleeing to neighboring countries.
Planting challenges are made more difficult as supply issues persist. Ukrainian farmers will be dealing with a shortage of seeds and diesel. Even if some Ukrainians farmers decide to plant, yields will likely be lower due to fertilizer shortages and substandard applications.
Ag Commodities
With Ukraine and Russia being responsible for about 25 percent of global trade in wheat and the ports being closed, grain prices are rising. Wheat contracts are currently trading on 14-year highs. If the conflict destroys ports and limits exports, this will also lead to pricing volatility in the coming months and into 2023.
Corn exports from Ukraine are also likely to take a hit. Farmers who have a choice in what they plant will likely not choose corn. Corn consumes more storage per hectare of production compared to other crops able to be planted. With the risk of corn silos being destroyed, Ukrainian farmers don’t want to plant a relatively high yielding crop. A corn shortage in Ukraine would be bullish for global corn and favorable for the U.S. farmer to help fill in the void.
Major wheat, corn, and barley importers including Egypt, Turkey, Indonesia, Vietnam, Japan, and China are all crucial in driving global commodity prices moving forward. These importers have decisions to make on where they originate sales and how to navigate any potential changes from Ukrainian or Russia origins. Major alternative exporters include the U.S., France, Brazil, Argentina, Canada, Australia, and India.
Input Markets
As with commodity markets, we’re looking at supply chain and logistics issues within other ag inputs. The fertilizer market is one of the most monopolized. Ammonia has the highest short-term risk as Russia is responsible for 20% of the world’s supply. Due to the conflict, a pipeline that supplies ammonia to the Black Sea for export has been shut down. U.S. farmers are unlikely to be affected too much for the upcoming planting season but could see pricing volatility for next year. The U.S. gets the bulk of its potash from Canada and relies on about 15% of potash imports from Russia and Belarus. The U.S. doesn’t rely on Russia for urea imports.
It's important to remember that while the U.S. will be able to manage some fertilizer shortages and pricing volatility, it’s a global market and the conflict can cause market realignment. It’s a global balance sheet, supply chain and network. All eyes will likely be on Brazil first from both a production and input standpoint. Brazil relies heavily on Russia for its input supplies. Brazil also has needy soil when compared to North American farmland. Many U.S. farmers have flexibility and could cut back on certain nutrients and use less fertilizer. Brazil farmland is heavily reliant on the right mix of fertilizer. Brazil is also experiencing a drought and if you couple that with a fertilizer shortage, soybean prices could shoot up.
Energy prices
Due to the conflict, energy prices have soared in recent weeks. For Ukrainian farmers, diesel is going to be a huge problem. Diesel prices are up 5 to 10 cents a gallon and are likely to continue climbing. Russia is the third highest oil exporter and responsible for about 12 percent of global oil trade. With sanctions and logistics issues, gas prices are expected to increase in the coming weeks. The conflict will also cause physical shortages due to damaged infrastructure and sanctions. So far, no sanctions have directly hit the oil industry but there is reluctance from refineries, tankers, insurers and banks to get involved with Russian crude oil.
Looking ahead
In the coming weeks we’ll continue to watch if any additional sanctions cause more market volatility. As we get closer to planting season the biggest question will be how much actually gets planted in Ukraine. Based on what happens over the next month we may see crop estimates in the U.S. change based on price and global demand. We could see a shift to more wheat and corn acres if opportunity arises.
What can you do?
There’s been a lot of questions from farmers about when to sell and if now is a good time. We can’t say when you should sell your crop. The market is also too volatile at the moment to give a solid recommendation. Best practices still apply here. Farmers typically don’t sell an entire crop at once. It’s best to trickle your crop in at various times. Trying to game the system too much is never a smart idea. Bremer’s Marc Schober says, “The best farmers have successful margins and that’s always the best thing to focus on. Placing your crops on the market at a price that you and your partners are comfortable with and ensure good margins is always sound advice.”