Sanctions will affect the supply of wheat in Russia.
Even though the ongoing conflict between Russia and Ukraine has already been priced into futures markets, grain markets worldwide will start to feel the effects of supply shortages on the world’s balance sheets for wheat and corn in August and September.
The way the rest of the world handles Russia’s finances will determine how a three million-ton global wheat supply imbalance develops. However, the main unknowns surrounding maize are whether Ukrainian farmers will be able to obtain enough manpower, fertilizer, and diesel fuel to sow the crop.
Joe Lardy, a market research analyst, gave a presentation earlier this month at the North American Millers’ Association 2022 Spring Conference with a focus on these worldwide outlooks. Over the course of a 25-year career in the grain industry, Mr. Lardy developed his proficiency in commodities. He began his career as a trader with Cargill, Minneapolis, and has spent the last eight years with CHS Hedging, Inver Grove Heights, Minn.
“My perspective on markets is from a very elevated position here at the space station,” Mr. Lardy stated. “As I attempt to present the perspective of what’s happening here and here and here and what’s interconnecting them, there are moments when I feel like Tony Stark from “Iron Man” with his enormous movable touchscreen computer.”
Members of NAMA, both milling and non-milling, received background information and analysis on wheat, which accounts for 14% of the world’s supply, and corn, whose production is significant in Ukraine but insignificant in Russia, during the spring session held at the Wild Dunes Resort in Isle of Palms, South Carolina.
wheat
Ukraine, one of the biggest countries in Europe and the 45th largest in the world, features a land area roughly the size of the US Midwestern states stretching from Chicago to central Kansas to Nashville tup to northwestern Ohio. Half of that land is devoted to agricultural endeavors that employ about 15% of the population compared with 3% of the US population. Wheat is produced throughout Ukraine, but most production takes place in the eastern areas, currently a hot spot for fighting, Mr. Lardy said. That’s unfortunate for grain since the region is a key southerly logistical route for crops to ocean-going ports, which are closed indefinitely and will require extensive rebuilding.
“Even if a peace treaty was signed tomorrow, there’s infrastructure that has been damaged and going to need to be replaced,” Mr. Lardy said. “The longer the war goes on, certainly the more destruction takes place, but there’s still going to be this period after the fact that’s still going to take a lot of time to get resolved.”
The USDA has reduced production and export projections in Ukraine for the current marketing year but eliminated neither. That’s because Ukraine already shifted a significant portion of its wheat crop before Russia invaded, Mr. Lardy said. Whatever remains in storage has the advantage of most easily feeding the populace compared with corn, which feed animal in an intermediary step toward feeding people. As for new crop, Ukraine is a few months out from a winter wheat harvest and, under normal circumstances, their supplies would hit the market in July-September. This year, Ukraine likely won’t be able to sell or ship any wheat in that period.
“We can see this on paper now, but when are we really going to start to feel the impact of this?” Mr. Lardy asked. “When the boats aren’t there, when the product doesn’t arrive, when people reach for the panic button, that’s when we’re really going to start to feel the lack of those shipments really kicking in.”
On the other side of the territorial dispute sits Russia, which turned wheat into a front-and-center commodity over the past decade since the country was stung by depressed oil prices. Most Russian wheat is grown in its western region, adjacent to the conflict. As a major exporter of wheat, Russia now factors heavily into the “world grid” of supply, Mr. Lardy said, but the flow of wheat remains in a war-time haze for now. The USDA lowered Russian wheat export expectations by 3 million tonnes, to 32 million tonnes in February. To date, restrictions imposed on Russian exports by the United States and many other countries have yet to curtail their exports of food and fertilizer, he said.
“Is Russia going to be able to continue to export and have that system operate?” Mr. Lardy asked. “If they don’t, that changes the whole dynamic. And we’ve seen the futures market react, pricing in the uncertainty. But it has not priced in a calamity. The US futures market has suddenly become the international market for wheat prices. The Chicago Board of Trade represents 4% of the world’s wheat. But right now, it’s getting all the trade, it’s acting like it is the benchmark of world wheat prices. Rightfully, it probably should. There needs to be this risk premium in the market because if you take out one of the leading exporters in the world, where does that gap get filled?”
At least in part by Australia and India, Mr. Lardy said. In the case of the latter, India historically hasn’t exported much wheat. But its crop is considerable and the country is looking to significantly increase its presence in the world market, Mr. Lardy said. At the same time, China was expected to lift Russian import restrictions and provide a potential home for excess Russian capacity. If China takes in more Russian wheat, that leaves Australian wheat to go other places, he said.
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But no matter how some wheat supplies find homes via atypical lanes and bring the market into relative equilibrium, the global wheat balance sheet is going to have some holes in it, he said. How the rest of the world treats Russia in terms of its financing is expected to dictate the path forward for the next crop year, Mr. Lardy said.
He declared, “The bigger the hole in the grid, the firmer the price will be. The more severe the sanctions, the bigger the hole will be.” “Every effect of this conflict is deferred.” The uncertainty has been factored in by the market. We have no idea how to value the catastrophe that is the 2022–2023 crop. I don’t anticipate prices declining until a peace treaty is signed, and on that day, I believe we will see a significant decline in the wheat market.
The petals of sunflowers and corn
So small is Russia’s corn production it doesn’t factor into the world grid, Mr. Lardy said. In Ukraine, unlike its wheat crop, corn grows largely in the northern and central regions that aren’t under Russian occupation and are outside the key fighting areas. Thus, the biggest unknowns as Mr. Lardy sees them are whether Ukrainian farmers can find enough supplies and labor to plant the crop in spring. Seventy per cent of Ukraine’s diesel fuel was supplied by Russia prior to the start of fighting, Mr. Lardy said. The availability of inputs such as fertilizer, also a major export from Russia, is in doubt, as is labor, though for far different reasons than in the United States.
“To me, the manpower aspect is a greater concern,” he said. “If you have able-bodied people, are they going to be planting crops or are they going to be fighting? What I think is going to happen, longer term, is that Ukraine is just going to be sitting on a stockpile of corn. So, whatever they can’t export, they’ll keep and as long as it doesn’t get destroyed, they’ll have it.
“Is their production going to be down this year? Absolutely. You can probably cut Ukrainian corn production in half this year. That’s a significant hit. However, they’re going to have a lot of stock left over. If this conflict doesn’t persist for years, when Ukraine comes back to the market, they should probably have a decent exportable surplus. The Ukraine problem isn’t a right-now problem, it’s a big-time next-year problem. Are they going to be able to harvest soon, and are they going to be able to get their corn crop in the ground?”
Another war-time impact to consider is sunflowers. Ukraine is the biggest global sunflower exporter in the world at 46% of the world market.
“They’re huge in sunflowers,” Mr. Lardy said. “Sometimes there are things we normally don’t hear about, see or talk a lot about, but that can have a major impact, especially if, as in this example, you’re impacted by sunflower oil and seeds. That could be a big loss for the world grid.”