Russia invaded Ukraine; what happens now?

This condensed explanation of the financial situation should help give some better context to the impact on grain and fertilizer markets, which is quite material as there are 3 core areas of disruption. First, in the fertilizer markets, we already know that China and Russia are banning phosphate/urea and nitrogen exports, respectively, until June 2022. With so much uncertainty in available/ exportable/purchasable fertilizer, these export bans could be further extended. Further, with Belarus now involved, it’s likely that potash exports from both them (the #3 producer) and Russia (the #2 producer) will be either sanctioned or go offline completely.

Yes, Canada is the number one potash producer in the world, extracting basically the same amount as Russia and Belarus combined. However, with fertilizer prices already high, and the northern hemisphere about to plant its 2022 crop and/or additional fertilizer an emerging winter crop, this may further restrict the amount of “groceries” put on the crop. I’m skeptical of any massive impact in North America, but it could certainly have an impact in Europe and the MENA region.

This is the second major area of disruption: there is an increasing reality that, with reduced fertilizer use because of high costs or unavailable supplies, global agricultural production could decline in the 2022/23 crop year and even trickle into the 2023/24 crop year. Since this has never really happened in a globalized world that’s dependent on today’s modern farming practices (read: fertilizer usage), this points to some very serious food security situations globally. Put another way, when there is a high cost of food, especially in developing countries that rely on food imports, societal instability usually results, which often leads to regime change (read: more geopolitical unrest!).

The third and final variable I’m considering is the direct impact on the ground in the Black Sea region. Farmers in Ukraine are a few weeks away from planting their spring crop and taking care of emerging fall-seeded crops (if required). Any loans not yet secured for the upcoming growing season are likely up in the air, as is the availability of any fuel, fertilizer, or other crop inputs. Let’s also not forget about the farmworkers/ labour who have either fled Ukraine or have risen up and joined the civilian guard there. Thus, there is a major agricultural production risk for Ukraine and this will impact many markets, including wheat, barley, corn, and oilseeds.

From an export standpoint, we know almost every major agricultural player has shut down their facilities in Ukraine and complicating all of this is the aforementioned international payment processing for goods traded. Even if port facilities did re-open, it’ll be very expensive, if not impossible, to get insurance companies to underwrite policies on the cargoes, let alone convince international buyers it’s a safe/ secure trade. For the hard winter wheat that Ukraine tends to export, international buyers will likely have to source from either the U.S. or Argentina, both of which have relatively tight exportable supplies today (not to mention, the U.S. HRW wheat belt is in a serious drought). There are also Ukrainian corn and sunflower exports to consider, which again, points to either South or North American substitution, but this is also dependent on competing for similarly-tight supplies. While Russia’s planting campaign will likely be unaffected, their exports will be embargoed in many areas, meaning we’ll see another game of exporter and importer musical chairs.

Given the highly volatile price action, it’s obvious that no one has a clear view on where things are going, as there are so many scenarios that could play out, even including Putin’s removal by his inner circle (AKA a coup). Even if the fighting stopped tomorrow, the ripples of stopped or delayed shipments and payments will certainly be felt for weeks, if not months to come. Therein, it’s certainly likely risk premiums will be added to grain markets, especially in May/ June as the Plant 2022 campaign finishes. Thanks to Russia’s action, there’ll be a lot riding on Harvest 2022, even more so than I’ve mentioned in the past. Accordingly, next week, we’ll look at how old and new crop wheat prices are being impacted (as well as any updates to the ongoing situation!).