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Agriculture

Ag Informer – The Ukraine Conflict: What does it Mean?

U OF ILLINOIS, OHIO STATE ECONOMISTS ON HOW RUSSIA’S INVASION WILL IMPACT 2022 ACREAGE, CROP INSURANCE, COMMODITY TITLE DECISIONS
Blog by Gary Schnitkey, Nick Paulson, and Krista Swanson, Department of Agricultural and Consumer Economics, University of Illinois and Carl Zulauf, Department of Agricultural, Environmental and Development Economics, Ohio State University

Russia’s invasion of Ukraine has created turmoil in all markets, including agriculture. As Midwest farmers approach key decision points, including the March 15 deadline for 2022 crop insurance and commodity title decisions, we briefly overview the Russian-Ukraine conflict.

Overall, the war likely will cause corn returns to increase relative to soybeans, but nitrogen fertilizer costs and supply will continue to be issues. Maintaining longer-termed rotations seem prudent. Higher price volatility suggests maintaining high coverage levels for crop insurance. Keeping policies with a guarantee increase, such as Revenue Protection (RP), seems prudent. The conflict has little impact on Commodity Title decisions.

Situation
Ukraine has 102.5 million agricultural acres, a little more than double the combined acres of Illinois and Iowa. With fertile soils and a climate akin to Kansas, Ukraine is a major wheat exporter, with a 10% share of world exports from 2017 to 2021 (see farmdoc daily, February 28, 2022). Ukraine has a notable share of world exports for other commodities, including corn (15%), barley (15%), and sunflower oil (50%).

The war has largely halted agricultural exports from Ukraine, causing spikes in some agricultural prices, most notably in wheat. How long Ukraine’s exports are shut down is unknown. The war likely will disrupt spring planting progress in Ukraine. To what degree planting disruptions will occur is unknown. Ukraine’s winter wheat crop was planted last fall and is reported in good condition. How disruptive the war will be on the wheat harvest is unknown.

Western countries have placed financial sanctions on Russia, attempting to isolate Russia. These sanctions are reported to have significant impacts on the Russian economy and could cripple the nation (see Financial Statements Will Create Wide-Ranging Impact). Depending on their effectiveness, those financial sanctions could provoke responses from Russia. Economic and trade sanctions on Russia and their responses could have more impact on global agricultural trade than the direct impacts on production in and exports from Ukraine.

While the war does not hamper agricultural operations in Russia, western sanctions will have significant impacts on agricultural trade. Together, Russia and Ukraine represent nearly 30% of global wheat exports. Wheat exports likely will be re-routed because of the conflict. Larger flows from Russia and Ukraine should be expected to countries more friendly with Russia, such as China and Pakistan. Countries less friendly to Russia will have to rely on wheat from other sources.

Disruption in all Russian trade flows should be expected, including in crude oil, natural gas, and fertilizers. Crude oil prices have increased already, hitting levels of $120 per barrel as bans on Russian oil are considered (see OilPrice.com).

Russia is a major natural gas supplier to Europe, providing 40% of Europe’s natural gas needs (see Can the US Supply Enough Natural Gas To Neutralize Russia’s Energy Leverage Over Europe?). European countries likely will try to reduce reliance on natural gas from Russia, with suggestions for how this could be accomplished already announced (see here). Europe will attempt to rely more heavily on natural gas from other sources, including importing liquid natural gas from the United States. However, these efforts will be hampered by a lack of infrastructure to fully offset Russian natural gas, including ships to carry liquified natural gas and ports to unload the gas.

Russian fertilizer producers have been requested to suspend fertilizer exports (see Wall Street Journal). Russia is a major exporter of fertilizer, accounting for 23% of ammonia exports, 14% of urea exports, 10% of processed phosphate exports, and 21% of potash exports (see The Fertilizer Institute). Therefore, the suspension of Russian fertilizer exports will cause fertilizer shortages and higher fertilizer prices. While an export ban will impact US producers, most likely by increasing fertilizer prices, European and Brazilian farmers will feel more of the impact, as those countries rely more heavily on fertilizer coming from Russia.

Situation Summary
Based on the above description, the following summary points result:

1. The Russian-Ukraine conflict likely will positively impact agricultural commodity prices. Wheat will be the commodity most directly affected, with large increases in wheat prices already occurring. Corn and soybean prices could rise as well. Given that corn is a substitute feed grain for wheat, corn prices could be more impacted by the conflict than soybeans.

2. At this point, assuming large negative impacts on 2022 Ukraine production seem premature. The war will have negative implications for progress, but one should not underestimate the resourcefulness of farmers in proceeding with farming operations. Ukraine farmers have survived in less than ideal conditions in the past. The size of planting disruptions will impact prices, and evidence of significant planting disruptions in Ukraine could lead to much higher prices.

3. The conflict will raise uncertainties in fertilizer markets, likely increasing prices and causing fertilizer shortages. As a result, fertilizer concerns will have significant negative impacts on fertilizer markets, with more of the impact being felt outside the United States than in the United States.

4. Sanctions on Russia likely will have longer-run impacts than the actual conflict in Ukraine. While initial commodity price responses are positive from the Ukraine conflict, scenarios can be built with much lower prices, likely resulting from attendant price inflation and economic recessions.

To view the complete report, click here.

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