Russia-Ukrine Conflict Adds To Marketplace Uncertainty

Russia-Ukraine Conflict Adds To Marketplace Uncertainty

Commodity futures prices such as corn and cotton and crude oil had already been steadily rising over the past year as users of these products found it increasingly difficult to keep pace with a demand boom that came as economies recovered from the pandemic. Russia’s recent invasion of Ukraine only worked to drive commodity markets higher as exports from that region began to dry up. You can see this demonstrated in the corn chart below where an already increasing corn futures price bounced significantly starting in early March. According to professionals in the trading community, this recent sharp price increase was due almost entirely to the Russia-Ukraine situation as past concerns about topics such as the health of the

South American soybean harvest quickly faded into the background.

BY JOHN MILLER

The bottom line is that Russia is a power very powerful player in the world supply of energy products, metals, and crops. In addition, the Ukraine is a top exporter in grains, particularly wheat and corn. The politics of this situation will likely continue to impact commodity prices for some time which unfortunately will work back to increase food and gas prices for American families. This past week, the US banned the importation of Russian oil, gas and other energy products as Russia simultaneously began to restrict the export of selected goods and materials to “ensure the security of the Russian Federation”. The exact list of is not yet know but is expected to include wheat and fertilizer. The fact that Russia is a major exporter of fertilizer to the US places more uncertainty about famers getting some relief from the already high input prices.

The Ukrainian ports remain inactive due to the invasion but are largely in working condition. The commodity trading community will be closely watching to see when the Ukrainian and Russian ports return to loading since these ports represent approximately 30 percent of the world’s wheat exports and up to 15 percent of the world corn exports.

Much like US farmers at this time, the Ukraine farmers would normally be preparing to plant their crops which is vital to restoring the export potential for wheat and corn from that part of the world. Unfortunately, a great number of Ukraine farmers do not have supplies of seed or fertilizer to plant corn with the chances of getting them in time are fading since the ports are closed under Russia attacks. Supply logistics are further complicated since the rail system is busy getting people out of the war zone and giving top priority to move in military and food

security supplies. It does not help that Russia is aiming to destroy as much Ukrainian port and rail infrastructure as possible to cripple that nation. The few farmers who had their supplies are trying to make the decision if it would be worth it to plant in the middle of a war. Given the complicated nature of farming there, most analysts have not surprisingly greatly lowered their Ukraine grain production estimates for the coming season by as much as 30% percent. To give you an idea of how farmers are caught in the middle, see the map below showing the concentration of wheat production in the Ukraine overlaid with the location of nuclear plants there.

In recent weeks, Russian troops shelled and occupied the Europe’s largest nuclear power plant located in southern Ukraine. This is the second Ukrainian nuclear facility to fall under Russian control which helps one draw the conclusion that Putin has no plans to back down. The second map is an interesting way to look at the region since it shows the Ethno-Linguistic dynamic of this region and helps one understand that so much of this area has people with a common language and culture fighting each other.

The trading community will continue to contemplate the risk to global trade flows created by the production uncertainties of this vitally important wheat and corn region, and overall supply chain disruptions as the war situation appears to be headed down longer term path. Imagine the human aspect of daily life and just going to work each day. Ukrainian officials recently announced that key employees in agriculture will be granted a military deferment to ensure timely planting and crop production proceeds. Ukraine has also found it necessary to ban the export of essential goods such as small grains and meats for food security purposes.

Meanwhile, the commodity marketplace will continue to try and factor in all the uncertainty, which at this time is running rampant. As calls grow louder for more countries impose direct sanctions on Russia’s oil and gas exports market prices are clearly responding as crude oil has recently topped $125 per barrel and the national average price of a gallon of gasoline has topped the dreaded $4.00 mark. With oil and gas revenues making up about 50 percent of Russia’s budget, world powers hope that sanctioning Russian energy exports will starve the Kremlin of money being used to attack Ukraine.

The unintended consequence of doing that however will be continued high energy prices that will throttle our own economic activity to some degree. For the US, Russia represents about 18 percent of our oil imports, so not insignificant. All of this uncertainly has created a sudden influx of cash from investors on concerns about red-hot inflation which would affect us all. The commodity markets are viewed by investors to be a hedge against rising consumer costs. Russia’s invasion of Ukraine only exacerbated fears the already ongoing fear of shortages for raw materials at a time when inventories across commodity markets were already tight. The final chart shows the Bloomberg Commodity Spot Index, highlighting where it touched a fresh record high in early March. Farmers across the Valley will likely continue to pay higher than normal prices for fertilizer and other inputs throughout this season. And consumers in general will continue to see food and gasoline prices at unwanted levels until we see some relief in the trade and movement of commodities.

(John Miller is the founder and owner of Southwest Ag Consulting that provides individualized risk management consulting services to farmers and ranchers across the south plains.)