Opinion: Ukraine conflict to impact commodity prices

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This opinion piece from WAFarmers CEO Trevor Whittington was published in our March edition. With Ukraine a major exporter of the world’s grain, the current war with Russia will impact global commodity prices.

Looking back over the past 110 years, there seems to be a close correlation between bullets flying and the price of both bushels of wheat and barrels of oil spiking upwards.

On March 9, crude oil prices hit a 13-year record high of US$126 (A$172) per barrel, up from US$111 in 2012, while the price of wheat hit a 14-year high of US$12.09 (A$16.47) a bushel, up from US$9.43.

You don’t have to be a trading genius to know that there is a link between the price of oil spiking and war in an oil region. But what about grain? After all, food security is as important as fuel security, and COVID-19 taught us it does not take long to clean out the shelves if something goes wrong.

Decreases in grain exports due to war will have a knock-on effect on global grain prices

No doubt the horror stories of the darkest hours of the Soviet era still lie deep in the Ukrainian psyche, having suffered through the Great Famine – a deliberate attempt by Stalin to force collectivisation onto the Ukrainian rural peasantry between 1932 and 1933.

In total, over five million people died of starvation as grain was hauled away to the cities in what is remembered as the Holodomor.

Hopefully, the current Ukrainian resistance will eventually convince the Russian forces to go back home, or, better yet, the Russian elite will wake up that Putin is bad for business and permanently retire him from the world stage.

This would allow Ukraine to focus on once again being the grains basket of Europe, with 32 million hectares of highly productive black soil averaging 3.8 tonnes of wheat per hectare.

Since breaking away, Ukraine has significantly climbed the ranks in global exporters, today being No. 3 in the world with wheat making up 12 per cent of global exports, corn 16 per cent, barley 18 per cent, and canola 19 per cent.

Between them, Russia and Ukraine account for 29 per cent of global wheat exports, which is eerily like that of the Middle East in terms of their share of global oil exports, which sits at 34 per cent.

Also eerily similar is the fact that both Black Sea grain and Middle Eastern oil producers must run the gauntlet of two narrow necks of land – the Bosporus and the Dardanelles – to get into global shipping waters.

If you wanted to pick a couple of choke points to threaten the world’s grain and oil trade and drive the price up, then these two offer perfect opportunities to lob missiles or mines into, to shut down trade – something the British Empire and our ANZACs found out the hard way back in 1915.

Any war that impacts access to the Ukraine and Russian breadbasket results in a spike in grain prices.

We have seen the same thing happen post-war because of the Middle Eastern conflicts. Any war that impacts access to the Middle East results in a spike in oil prices.

It does not take much to spook markets when one side resorts to bullets to get what they want.

In the Gulf, when this happens, the Americans are quick to step in, but in the Black Sea, the Americans are not so welcome, with it being the Russians’ backyard and Turkey determining who enters and leaves.

Besides, any supply crunch out of the Black Sea that drives up the price of wheat and corn is not going to upset American farmers or their congressmen, hence they are in no rush to be sailing up the Dardanelles with the Seventh Fleet.

But, even without the threat of the shipping lanes being closed, the current conflict is driving up the price of grain. The supply shortage of grain is exacerbated by the closure of ports in Ukraine and the refusal of shipping services to enter both the Black and Marmara Seas for insurance reasons.

Add to that Russia’s wheat exports are already down about 20 per cent year-on-year, as it is believed that Putin was bolstering domestic supplies in anticipation of the Ukraine invasion, and the potential uplift in export prices caused by damage caused to transportation infrastructure.

So, we have in part a war-induced grain price spike and an oil-induced grain price spike both happening at the same time.

What’s interesting is the link between oil and grain is bigger than anything to do with drought or war, as economists have shown a 0.7 out of 1.0 positive correlation of grain prices following up the oil price.

But, as always, there is nothing like high prices to bring down high prices. Prices reversed soon after the last peaks when the global financial crisis led to a decrease in world oil demand, resulting in a drop in crude, dropping 70.3 per cent from July 2008 to January 2009.

In turn, wheat prices declined 24.2 per cent over the same period. Prices for agricultural commodities again increased rapidly from mid-2010 to mid-2011, with wheat up 91 per cent while crude prices rose 50.1 per cent.

In the period from 2014 to 2018, as oil production increased, it saw a sharp drop in crude prices decreasing 52.5 per cent with wheat prices falling 16.2 per cent.

So, even without a war in the Middle East or the grain basket of Ukraine and Russia, there is a correlation of wheat prices following oil prices up and then down. No doubt global crop plantings, drought, fertiliser costs and economic activity have much to do with driving wheat production and prices, just as exchange rates, interest rates and economic activity drives oil demand.

But we can also see that outside the normal supply and demand pressures there is a link between bullets flying, barrels pumped, and bushels grown. It’s all connected but it’s nothing new, we have seen it all before and we will see it again.

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