Before Putin’s forces even breached the Ukraine border, fear and speculation drove commodity prices skyward. Concerns are warranted: Trade disruptions in energy, fertilizer and grains are inevitable. In fact, effects are likely to last for years, possibly even decades.
GAPS IN GRAIN
Ukraine and Russia are major grain exporters (see chart). As of March 22, Ukraine’s ag minister said this year’s spring planting could be half last year’s 37 million acres. He also worries only half the 16 million acres of winter wheat that was planted in Ukraine last fall will get harvested.
Geopolitical strategist Peter Zeihan is even more pessimistic, predicting virtually no 2022 crops will be harvested in Ukraine, and what is will be used internally. Here are his reasons:
- Russian troops are destroying towns to wreck any guerrilla infrastructure preemptively. This also destroys ag infrastructure.
- Ukraine has limited industry. It can’t make machinery or fertilizer.
- Imports of any kind are difficult or impossible. At present, ag products are not included in sanctions, but ships already are refusing to dock in nearby ports. If Russia succeeds in capturing Odessa, the world’s largest wheat offloading facility, it would cut Ukraine off from any sort of maritime supply and utterly destroy its agriculture.
Zeihan predicts Ukraine will be sent into “a 1980s Ethiopian-style famine” for years. “Ukraine is not just vanishing from agriculture this year, it will shift from the fourth-largest total agricultural exporter to a net importer until the Russian system collapses,” he says. “That won’t be this decade.”
Also, Russia has banned wheat sales to many countries in 2022 for political and economic reasons.
Egypt and Yemen, which rely on Russia and Ukraine for wheat, already are feeling the impact of the war, reports Joe Glauber, economist with the International Food Policy Research Institute. Global wheat markets have been tight since mid-2021, then the war triggered a spike to record prices.
ENERGY DISRUPTIONS
Russia’s oil and gas production and exports are already in disarray, Zeihan says. Their pipelines are overwhelmingly oriented to the West, where the crucial European markets lie. Pipelines that cross Ukraine or Belarus will go offline in the face of war damage or sabotage to limit Russian income.
Supplies transported by ship face an inability to dock due to insurance requirements or because European dockworkers refuse to take in Russian cargoes, Zeihan says.
“So Russian energy export prospects are pretty much limited to rail and existing rail customers, such as Iran and to some degree China,” he says. “The probability is low it can rely on a surge of shipments to new markets due to lack of infrastructure.”
Russian refiners are shutting down because no one is taking the oil out of the pipes and pressure is building back to the wells. If they have to shut the wells down, they will freeze and leak and would need to be redrilled.
“The last time that happened was in 1989, and it took 32 years — literally until now — to get back up to speed,” Zeihan says.
In this respect, U.S. farmers will fare better compared with other regions. Global investments in oil and natural gas capacity fell 60% between 2014 and 2020 as many bought into the belief “fossil fuels are done” and other energy sources would take over.
Unlike the U.S., Europe relies on imports for 90% of its gas and 97% of its oil products, according to the U.S. Energy Information Administration. Russia has supplied 40% of Europe’s gas and 25% of its oil needs.
FERTILIZER FRENZY
Russia is the world’s largest exporter of fertilizers, accounting for:
- 23% of ammonia exports
- 14% of urea
- 10% of processed phosphate
- 21% of potash
Russia has ceased fertilizer exports, and sanctions by many countries are enforced against potash from Russia and its ally Belarus, which accounts for 40% of the world’s supply.
“Unlike Brazil, the U.S. has a robust fertilizer industry,” says Gary Schnitkey, University of Illinois agricultural economist. “In fact, the U.S. has 16 companies that produce ammonium, and phosphate is mined by five companies in 10 U.S. mines.”
However, he says, higher global prices do mean higher U.S. prices.
USDA is supporting financing for new, independent production, with details to be announced this summer.
“It will take at least three years to get new phosphate and nitrogen production [from the Middle East and U.S., respectively],” Zeihan says, noting additional phosphate from Canada could take 10 years.
This year’s U.S. crop favors corn over soybeans, but over time, Zeihan believes a shift will take place from corn to soybeans. To wheat producers, he says: “This is your time. Wheat was relegated to marginal areas because it is unfinicky. But remove the first- and fourth-largest wheat producers, and with fertilizer too expensive for a third of the world’s farmers, plus a desire to reduce production costs, and global planting patterns will change.”
Brazil will be hit much harder than the U.S. by reduced fertilizer shipments from
Russia: It imports 85% of its fertilizers, and production in some areas would be impossible without high levels of fertilizer use. So, the U.S. will have an advantage.
Read more about the conflict in Ukraine.
