In addition to the other horrors generated by the war, the conflict between Ukraine and Russia has destabilized commodity markets. Commodity prices incorporate a substantial risk premium due to the high chances of lower production, higher costs, and more supply chain disruptions.
Dates and Deadlines
3/9/2022 – North Region Production Education Online
3/11-12/2022 – Southwest Beef Symposium
3/15/2022 – ARC/PLC Sign-up Deadline
3/17/2022 – Briscoe County Cattle Program
3/23,30, 4/6,13/2022 – Master Irrigator
3/25 – 3/27/2022 – TSCRA Convention
4/26-27/2022 – Hemphill County Beef Conference
What We’re Reading
Maximizing crop profits under limited water – AgriLife Today
What’s at stake for global economy as Russia standoff escalates? – Farm Progress
USDA cuts corn, raises soy and wheat acre for 2022 – Farm Futures
Russian Invasion of Ukraine effects in our Operations
These unprecedented times due to the Russian invasion of Ukraine made us change our schedule and write about the effects this conflict is having on our operations. In addition to the other horrors generated by the war, the conflict between Ukraine and Russia has destabilized commodity markets. Commodity prices incorporate a substantial risk premium due to the high chances of lower production and more supply chain disruptions.
Distant conflicts can significantly affect our farms, ranches, and towns in this globalized and interconnected world. We were able to see this during those difficult months of the covid pandemic, and now we see it in the prices of supplies, commodities, and diesel that we pay every day.
In this article, we will focus on those variables affecting the grain market in the world. Considering the great uncertainty of this incomprehensible moment, we will analyze today’s market drivers. Primarily we will focus on the wheat, cotton, and beef-cattle market given the importance to our region.
Both Russia and Ukraine are significant producers and exporters of wheat (Graph 1 and 2). In the last five years, Russia produced 10.3% of the world’s production (78 million tons, or 2,860 million bushels). Ukraine’s average production over the last five years was 3.7% of the world’s production (28 million metric tons, or 1,026 million bushels). Although Ukraine’s percentage of world production is not very large, its share of world exports is significantly essential. Ukraine’s exports have represented 10% of world exports in the last five years, while Russia’s share was 19%.
Graph 1. World Wheat Production (Source: USDA – WASDE)
Graph 2. World Exports Participation (Source: USDA – WASDE)
Most of the wheat produced in this region is winter wheat. This wheat is sown in the fall and harvested in early summer. In other words, most of the grain in Ukraine is already planted. Considering how difficult it is to solve the Russian invasion in the short term, we can expect lower wheat production in Ukraine in the best-case scenario. Wheat fields still have to be fertilized, managed, and harvested correctly. The lack of inputs and work capacity will indeed affect the production in Ukraine. In Russia, the case is different; since these areas are not in conflict, they can continue to be worked on correctly.
Of the wheat areas in production this season, three regions have watch conditions. United States, Spain, France, and Italy due to drought conditions. Ukraine for the war (Graph 3.)
Graph 3. World Wheat Conditions. (Source: Geoglam)
In the last five years, the average world carryover of wheat was 37% (Graph 4). Assuming a very conservative scenario, with a higher yield decline in the United States than last year (40 bu/acre), a lower European wheat output, and a 50% Ukrainian wheat output, the world carryover could decline to 29%. This carryover projection considers the same global level of global consumption and that off-season wheat countries do not increase the planted area due to these high prices. This carryover is above the low levels from the 2008/09 and 2011-2014 seasons. Assuming an extreme case with no wheat production from Ukraine, the carryover would be 27%, also above 2008/09 values. Only taking significant losses in Russian wheat production, carryover values would be below 2008/09.
Graph 4. World Wheat Carryover.
If we look at historical prices, only in the 2008/09 season, and for a brief moment in March 2008, wheat prices were above today’s values (Graph 5). Today’s wheat prices account for lower wheat production in Ukraine, but they are also considering the risk of a larger-scale conflict and significant supply chain disruptions.
Graph 5. Kansas HRW Historical Cash Prices (Source: Barchart)
Worldwide there is wheat, although stocks in the United States have dropped significantly in recent years. The combination of high production and logistics risks in Ukraine and low stocks and expected low yields in the US increase price volatility.
This campaign is trading very high wheat contract prices. Even though the value of the July 2023 HRW contract is above $8/bu, it is still much lower than the almost $12/bu price for this July contract. Therefore given these future prices, there is a low risk of contracting at today’s prices with contracts that can be rolled for next year if production is lower.
The US does not trade directly with Russia or Ukraine, so we do not see direct effects on the markets. We fear significant indirect impact due to increased costs, mainly feed, and the risk of recession in the world and inflation in the United States.
The graph below showed both May 2022 Feeder and Corn Future Contracts. If we look carefully at the graph, we can see the negative correlation between the price of corn and feeders in these last two weeks. Steer prices lost nearly $10/CWT in these weeks as corn prices rose (Graph 6). This was due to the high correlation between the price of corn and the cost of feed. It significantly affects our areas already affected by drought and with very poor winter pasture conditions and high feed costs.
Graph 6. Corn May 2022 Future Contract – Feeder Cattle May 2022 Future Contract. (Source: Barchart)
The effects on the price of cotton are indirect as well. As we have seen in the market, cotton prices remained somewhat below the values of weeks ago (Graph 7). Keep in mind that apparel is a product that consumers buy with disposable income. When consumers’ purchasing power decreases, cotton is one of the products that consumers first stop buying. We saw something similar at the beginning of the covid pandemic.
Graph 7. Cotton December 2022 Future Contract. (Source: ICE Market)
A war could lead to a recession in part of the world by lowering purchasing power. We would have a bearish scenario for cotton prices if this were the case. On the other hand, the high prices of corn and soybeans may decrease the estimated cotton area, which was 12.5 million acres. This last scenario will support prices.
Commodity prices are incorporating a substantial risk premium due to the high chances of an increase in sanctions to Russia, an escalation of the conflict, lower production, and more supply chain disruptions, especially in the Black Sea region. Russia is also an important player in the fertilizers, crude oil, and natural gas markets which have also seen a sharp price increase. Like in 2008/09 season prices are not exempt from downward risk too. These are times for good risk management and a cost-efficient management system focused on maximizing profits. In case you have to lock in high input prices that will increase our breakeven prices, don’t forget to do something similar on your marketing plan.