Energy is not the only resource challenge in play in the war between Russia and Ukraine. So are food and fertilisers, which are already a concern.
Russia and Ukraine account for 29 percent of world wheat exports, according to the US Agriculture Department. The nearby Black Sea is natural of a shipping route for their produce. Ukraine is also a major supplier of corn, barley and other grain.
U.S. wheat futures on Friday soared to their highest levels in almost 14 years. Corn held near an eight-month high and soybeans rose.
This is not a new trajectory. Grain prices have been responding to the current situation in Ukraine for months. Distant January wheat futures in late January rose to 830 cents, nearing the nine-year high above 860 cents set in November 2021.
On the other hand, global demand for wheat has increased due to population growth, as well as improved income-driven quality-of-life indicators. Global wheat production for 2021/22 was reduced 2.2 million metric tons (MT) to 776.4 million MT in the U.S. Department for Agriculture's latest wheat outlook.
Global wheat consumption, though, was forecast to increase 0.6 million MT to 788.1 million. It believed the decrease in food, seed and industrial use was not nearly enough to offset an increase for feed and residual use.
Grain inflation
And with supply going down and demand going up that can only mean one thing.
“The current state of the conflict will undoubtedly affect global grain markets, especially as Ukrainian exports will largely be blocked down the line”, stresses Ignace De Coene, equity fund manager in the team responsible for the management of the DPAM INVEST B equity fund focused on sustainable food trends.
“Broadly speaking, we should prepare for price increases on all major grains (wheat, corn and soy)”.
Given Ukraine’s and Russia’s ability to materially export these commodities and the ability of Russia to circumvent sanctions, how far these price movements go will depend on the manager – but China is likely to remain a willing buyer as evidenced by the huge volumes they import every year.
But that is not the whole story.
“The majority of these exports are shipped from Black Sea ports, at the epicenter of where military action may take place,” a report from Capital Economics’ team of senior economists says.
“Beyond the port problem, there’s the risk of crop damage in Ukraine’s wake, in the aftermath of fighting on the ground. Because of the magnitude and severity of the risks, we have also increased our short-term targets for most agricultural products by about 25%”.
Most notably, Capital Economics estimates that this crisis may be worth 1.5% to eurozone inflation this year (driving mainly from a rise in food and energy costs), which itself could force the European Central Bank into a corner on interest rate rises. They may now arrive sooner (and harder) than originally anticipated.
“In terms of food costs, any disruption in supply from Russia and Ukraine could end up being material, with the economics of the large supermarkets and retailers’ business models not being configured to pass through quick and big price increases”, explains Michael Field, a senior equity analyst.
Critical yield
Commodities serve as a geopolitical hedge from an investor standpoint.
“Russia is responsible for approximately 40% of European Union gas imports and 30% of oil imports,” notes Mark Haefele, chief investment officer global wealth management at UBS.
“But Ukraine is a significant exporter of corn, wheat and oilseeds. “Given the risk of supply disruptions, we believe broad commodities can act as an effective hedge to geopolitical events for portfolios, as well as represent an attractive source of returns in a world of accelerating growth, structural inflation and higher rates”.
However, it is not a blanket picture. Heightened prices will affect companies in the supply chain differently.
“Companies further down the agri-food value chain (particularly large B2C consumer companies) will likely be impacted by an inflation in food commodities,” says DAPM’s De Coene.
“But elevated prices of commodities will also boost farming firms’ income and encourage them to maximise yields and productivity. They will thus spend more on better seeds, special fertilisers and equipment, [thereby] boosting earnings of companies working in those segments,”.
The re-route
Lastly, the invasion of Ukraine has stoked fears over fertiliser supply. In 2021, Russia was the world’s largest exporter of nitrogen, and the third-largest of potash. It ranks fifth in phosphate exports.
“If sanctions were to target Russian fertilizer exports, we think that the more-expected response would just be a switch in global trade flows,” adds Seth Goldstein, another senior equity analyst.
“The EU is not the biggest market for Russian fertiliser exports. “Russia’s No. 1 phosphate export market is the US.”
But the US had already acted to squeeze volumes of Russian fertiliser imports through anti-dumping import duties on both nitrogen and phosphate and the sanctions are not as effective as they potentially could be.
We see little long-term impact from possible sanctions against Russia and existing sanctions against Belarus in potash,” says Goldstein.
“These nations account for about 40% of global potash exports. We believe that production from Belarus and Russia would probably be sent to China, which could then sell the product to other nations. China has long been the world’s biggest phosphate exporter, supplying countries including India, Pakistan and Brazil. As such, we believe the country has the potential to leverage its existing fertiliser trade relationships to export potash if required,”
