KANSAS CITY, MISSOURI, US — Russia’s invasion of Ukraine has added volatility to what was already an unpredictable marketplace in grains, energy and farm inputs, said Rabobank analysts in a call March 1 with journalists about the impact of the crisis on food and agriculture markets.
“Grains and oilseeds were already in a rally, moving much higher, and then this happened,” said Stephen Nicholson, global grain and oilseed strategist for Rabobank. “It really adds fuel to the fire.”
Wheat is the biggest concern, he said, because combined Russia and Ukraine amount for 29% of exports, based on the five-year average.
“Where do we come up with the wheat? Russia and Ukraine don’t carry much stock, they either use it domestically or ship it out,” he said. “If you look at the other exporters in the world, there’s not enough stocks there to make up that loss of exports that may not happen from Ukraine and Russia. That’s a real concern and why the wheat market was so quick to react.”
It is likely countries such as the United States, South America, the EU and Australia, which had a record crop this year, will see an increase in wheat exports.
He did add that for this year, Russia and Ukraine already had shipped a lot of wheat, corn and barley, so it’s not like others would have to make up the whole year.
“This just adds to the price volatility we already had in place,” Nicholson said. “Buyers are going to have to think about where they’re going to do business.”
He noted that Bunge and Archer Daniels Midland Co. (ADM) already have suspended some operations in the region.
“Do they go back to that region? Are they willing to put up with the issues of doing business there?” he said. “Buyers have to think if they want to put their supply chain in danger.”
Russia supplies 78% of the world’s sunflower oil exports, mostly to Asian countries. They are going to have to find alternative oils, Nicholson said.
“That’s going to be a challenge,” he said. “We’ve seen vegetable oils around the world are very tight because of demand for biodiesel and renewable diesel. It’s going to put pressure on palm, but palm has had its issues. We don’t see palm production rising because plantations are old and have not been replanted over the last several years.”
Another concern Nicholson said is the possible impact of sanctions on financing for farmers.
“Is it already in place? Are they able to get it this spring?” he said. “I think about farmland as battlefields, and some of that ground just won’t be available. It’s just a challenge to put in a crop any place in the world, let alone in the middle of a conflict. I think that’s something to be watching as we go forward.”
In terms of price action, Nicholson compared the invasion to a drought, where the market spikes and then sets back as it digests the smaller crop and gets used to it.
“We’ve seen a huge spike and we will see a setback, but likely a setback at a higher level than we would have if this conflict hadn’t happened,” he said. “Prices are going to be extremely volatile. The question is how long and how high. We won’t know that until we will.”
The invasion is also adding instability to the input markets, said Samuel Taylor, farm inputs analyst for Rabobank. This includes the production and export of fertilizers out of the region and the flow of natural gas, which is used in the production of fertilizer, out of the region.
Russia and Belarus account for 40% of global potash exports and Russia accounts for about 22% of global exports of ammonia, 14% of global exports of urea, and 14% of global exports of monoammonium phosphate (MAP), which is used in soybean production.
Finding alternative sources for some of these products isn’t simple, Taylor said, because several, such as ammonia, have a rigid, specialized structure for delivery.
“Ammonia is transported from pipeline in Russia to the Black Sea,” he said. “That has been shut off. That is a market where we see a greater risk of volatility, albeit from a very high price base at the moment.”
Some countries have a higher dependency on inputs from the Russian/Belarussian market, he said, including Brazil.
“Brazil has a nutrient-hungry soil and not as strong domestic production platform on fertilizers,” Taylor said. About 46% of its potash, 27% of its urea and 30% of its MAP comes from the region.
“When we look about for a need for supply chain realignment, we have to look at Brazil as a country in great need,” Taylor said.
So far, markets have been quite stoic since the invasion started, he said, likely because of seasonality.
“I would expect price volatility, and imagine quite a wide spread between the top- and bottom-line pricing on individual macro nutrients globally, as we see these supply chains realign,” Taylor said.
Natural gas also was facing volatility prior to the invasion, and will only see further price increases, spiking to over $200 a barrel in oil equivalent terms, particularly in European markets. Russia is a significant supplier of natural gas and exports it via a pipeline network to Europe and Asia as well as via waterborne LNG export terminals, said Ryan Fitzmaurice, energy commodity strategist for Rabobank.
“Europe is most at risk for physical supply shocks whereas the US is more at risk for sticker shock at the pump and at home,” Fitzmaurice said.
Because of an extensive and cost-effective pipeline network, Russia controls more than 30% of European oil imports and 35% of natural gas imports.
Overall, Russia produces 10 million barrels of crude oil, 10% of global supplies, and exports more than half of its crude oil production to overseas markets. It is also a meaningful exporter of refined products such as diesel and gasoline, he said.
So far, energy has been carved out of any sanctions by Western nations to maintain orderly commodity markets, he said. But European companies are already backing away from doing business with Russia given the increased risks.
“BP and Shell, two of the European global oil majors, have rushed to divest Russian joint ventures and European refiners are scrambling to replace Russian crude oil grades with alternatives, such as more price North Sea crude oil grades,” Fitzmaurice said. “The fact of the matter is we haven’t seen a supply disruption yet, but I think that is certainly a risk as we move forward.”
The 2011 Libyan civil war was the last real oil shock to Europe and the global markets. During that time, European exports dropped to essentially 0 from 1.25 million barrels per day and the price response moved from $90 a barrel to $125 in four months’ time.
“Certainly we think we could see a move similar in scope to that, and potentially more upside given Russia’s greater stature in the energy markets,” Fitzmaurice said.