The conflict raging between Russia and Ukraine has helped drive grain and food-oil prices to historic highs. More price increases are on the horizon if the war continues, especially when it comes to wheat, oilseeds, and corn. But it’s not all about Ukraine.
The outlook for grain and food oil was already challenging. Since the invasion, prices have increased sharply. How much higher they go depends much, but not completely, on what happens over the next few weeks in Ukraine. A quick resolution could help solve at least some of the price increase issues.
So far problems related to Russia’s aggression haven’t affected balance sheets. No one is yet talking about food shortages. But a long-term war could lead to deficits in a few food categories, which would push prices incredibly high.
Grain and Food Oil
To say Russia and Ukraine are critical to the world’s food supply chain is an understatement. Together they export about 30% of the world’s wheat, 60% of the world’s sunflower oil (the third-most-traded seed oil behind palm and soy), and about 20% of the world’s corn. Concerns about these countries’ ability to fulfill demand come at a time when inflation, poor weather forecasts, and soaring energy prices have already raised the stakes for agriculture markets.
The worst of the trouble is still a few months away, and the wheat market is not yet at the panic point, at least not on wheat futures. If the conflict in Ukraine lingers into June or July, that’s when all these markets could see significant price hikes because the effects of the war would start to impact 2022 crop planning.
Before the conflict, wheat was trading at roughly $8. Now it’s nearing $11 on the KC contract. Yes, these markets are unbelievable, but expect to add another 20% if these issues are not resolved within the next two months. That’s because right now the market is in something of a lull on wheat with Russia and Ukraine coming to the end of an export period for 2021’s old crop. This year’s crop is already in the ground, which alleviates some short-term concern but not all of it because of issues that still threaten wheat’s reproductive cycle.
Corn, which already has serious yield concerns because of dry weather in the U.S. and South America, was trading at about $6.50 per bushel before things got really excited. It’s moving closer to $7.40 right now. If the conflict continues and this becomes a three-month story, expect prices to go to $8.40 or $8.60.
Soybean oil prices moved from roughly 65 cents to about 77 cents per pound after the conflict started. If the conflict lingers, that could push up to about 86 cents. Palm oil is already in short supply, and there are even concerns that some of our competitors are limiting palm oil exports. It could easily move up to $6,900 a ton.
To get a sense of why the prices are set to go up, it’s important to know about the life cycle of a plant, like corn or wheat. Planting phase requires a lot of prep work: crop planning, trips to a local dealer for supplies, parts for machines, budgeting, etc. Once the seeds are in the ground, they germinate, sprout, grow, and reproduce by flowering and fruiting. The plants require water throughout their life cycle, and fertilizer is critical for the reproductive phases.
Fertilizer Shortages
Since last fall, Russia and China have been restricting fertilizer exports, and now supply is short and prices are high. That’s put stress on planning for crop acreage, as well as yield estimates for what’s already growing. The amount of fertilizer and its effect on yield are especially tricky to predict. Predicting how much rain a crop will need is more of an exact science. Farmers have thrown away fertilizer overage in the past.
It’s still unclear if the Russian production decline will be exaggerated by the war. Ukraine’s production may also be impacted, which makes the fertilizer predicament not just about pricing but also availability.
Brazil, specifically, has a large corn crop that goes into reproductive phase mid-March through April, and there is a concern about getting them a last fertilizer push just before reduction.
United States corn and soybeans enter their reproductive phase in July into early August, and those crops will need fertilizer too. Farmers may be hesitating to make plans to ramp up planting now because the fertilizer market is going to be so difficult.
In order to blunt the impact, fertilizer production numbers must rebound in the next month to month and a half, not just for Northern Hemisphere corn and soybean plantings but also for the Southern Hemisphere. In Argentina and Brazil, both of which already planted their soybeans, the crops have gone past reproductive phase. The damage is done.
When it comes to winter wheat that’s in the ground in Russia and Ukraine — which is the same in the U.S. — there’s probably about two to three weeks to fix on the fertilizer side.
If not, the trade might be happy about keeping a premium in grain prices until they see yield developments later on this year.
About Rich Nelson
Rich Nelson is Chief Strategist for Allendale Inc., a nationwide research and brokerage firm that specializes in agricultural markets. He is a regular guest with Fox Business News, This Week in Agribusiness, U.S. Farm Report, and AgDay. He is heard on up to six separate nationwide farm radio networks and is interviewed by the main newswires daily.
This agriculture industry is adapted from the January 20, 2022, GLG teleconference “Grain Pricing Outlook, Russia & Ukraine Impact.” If you would like access to similar events or would like to speak with Rich Nelson or any of our approximately 1 million experts, please contact us.
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