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From Ag trade and government agencies to the farmers prepping fields for Spring planting, there is one certainty stemming from the Russian invasion of Ukraine: the impacts of this conflict on international business are already in motion, and there are expected to be many ripple effects to come.
Insights around Uncertainties for Producers
While the war is taking a direct toll on the people of the region, it is also impacting food and ag economies around the globe. Given the fluidity of the war and global sanctions, it is impossible to forecast accurately how U.S. agriculture will be affected by the war in Ukraine. But it’s important for agribusinesses to keep a pulse on potential impacts – to brace for them and alleviate them where they can.
KCoe’s ag advisors have provided a summary for ag businesses on the most significant impacts which could affect trade, inputs, marketing, and sustainability.
The Russian invasion of Ukraine is creating extreme volatility in agriculture markets and will undoubtedly impact global food and energy supply chains for the remainder of 2022.
- Ukraine and Russia are significant agricultural producers, accounting for 29% of global wheat exports, 17% of global corn exports, and 77% of sunflower oil.
- In addition, Russia and Belarus are significant producers of fertilizer constituting 40% of global potash exports. Russia also accounts for 22% of global ammonia exports.
- Finally, Russia is the third largest energy producer in the world and generates 10 million barrels of crude oil a day.
In addition to these commodities, global supply chains are increasingly interconnected such that disruptions in Ukraine and Russia may have ripple effects on a wide array of products including components for agriculture equipment.
Ukraine has just announced that it is putting a moratorium on exports of agricultural products. This is somewhat symbolic since the Black Sea ports that would move Ukrainian agriculture products to market are largely shut down. Russia and Belarus, meanwhile, face crippling U.S. sanctions including disconnection of many of their banks from the SWIFT electronic transaction system. These sanctions will dramatically disrupt global exports from those two countries.
One large uncertainty is how U.S. agriculture will be differentially affected versus other countries. Brazil, for example, is much more dependent on Russian and Belarus fertilizer imports than the United States. Similarly, the European Union’s (EU) food supply is more dependent on agricultural exports from Ukraine.
Other areas of concern we are monitoring:
- How this will play out within the U.S. discussions with China. Agribusinesses are waiting to see whether the U.S. softens its position on China for the time being so that it can focus global attention on Russia.
- It will not go unnoticed if China becomes emboldened since the U.S. and EU are tied down with Russia.
- All eyes in the Ag industry will be watching Russia, should it orient more toward China as a consumer of its energy and ag products and for stability for foreign currency.
With news around the immediate areas where significant impacts on agriculture are taking shape, there are understandable concerns around fertilizer availability, increasing commodity prices, and fuel. More vendors are wanting to be paid upon delivery of products due to their cash outlay and booking prices varying day-to-day.
The conflict affects these resources greatly, and agribusinesses are already voicing concerns by asking how long this high commodity priced market is going to last. Many question what happens if all the acres in the U.S. get planted on time and we have a record crop. There is definite apprehension on whether expenses will follow a commodity market downturn.
How should you be reacting? While none of us can control the markets, we can take steps to protect our operations. Every agribusiness should work to keep their debt down. We are in a very volatile market and prices could look very different next crop year.
Look at optimizing your debt structure. Have a conversation with your lender about borrowing capacity, structure, and interest rates. This is not the year to scrape by with an inadequate line of credit. Credit will be needed to prepay or build inventory up so that producers have the products needed for the 2023 crop year.
Producers also should monitor cash flow needs closely and run cash flow statements monthly. Reviewing your cash flow needs and discussing them with lenders and key stakeholders regularly will be crucial.
Both Ukraine and Russia have become an important source of global ag commodities in the past 25 years, with both countries combining to represent 14% of global wheat production. Most of us have not seen this type of volatility in the wheat market in our lifetimes. Because of this volatility, we are urging producers to have a conversation about the risk of doing nothing. In this market, and at these price levels, even small decisions can have a substantial impact on the operations bottom line.
For example, recently we saw many buyers shift away from the nearby May contract, and now are bidding off the December contracts. What this means is that merchants stopped buying and essentially went “no bid.” Why did they do this? They did this because they were unable to buy, process, and turn it around and make a margin within that time frame. As a result, we saw cash basis in wheat contracts expand dramatically in a matter of minutes.
Producers need to be watching what is happening around the world and talking to their marketing advisor. These are unprecedented times and failing to look closely at their current risk could result in getting caught in a market situation that could cause them losses. It’s imperative that producers take steps to protect their operation in case we see a scenario where markets break, and don’t recover quickly enough.
U.S. agriculture may be seeing some significant impacts on sustainable food and agricultural systems should input shortages and price shocks continue through this year. We know that productivity on working lands is critical to meeting the sustainability goals across the food and agricultural sector. Productivity reduces intensity (per unit) from greenhouse gasses (GHGs), protects fragile lands like the Amazon rainforest and protects land that is already in conservation programs.
This isn’t just uncharted territory for farmers, but also for companies and industries who are trying to do the right thing! Many have committed to making significant reductions in their greenhouse gasses and to improve factors such as water use and quality as well as focus on biodiversity or regenerative agriculture.
Other areas of concern we are monitoring right now include:
- The impact this may have on leading initiatives such as Science Based Targets, which link up what happens on the farm throughout the food system to create a target for GHG reductions. More uncertainty will make this planning process more difficult.
- Whether the U.S. and the EU will dial back some of their most critical sustainability policy efforts, such as the Conservation Reserve Program here in the U.S. and Farm to Fork in the EU, in order to stabilize food supply.
This unprecedented shock to the global food system doesn’t just impact hunger and the economics of the food and agricultural system, but global efforts to make critical gains in the climate crisis as well.
KCoe’s Ag advisors will continue to monitor breaking developments and provide strategies to mitigate the global risk inherent in this crisis. Contact a KCoe advisor with questions.