Ukraine, Russia, and crops
The crop markets were already on a tear before the outbreak of the Russian-Ukrainian war, and the war provided more support for higher, and more volatile, prices. The conflict has significant implications for old crop and new crop pricing, along with impacts on ag input costs. Let me start with that last item first. The war and the economic sanctions being imposed on Russia has redoubled the pressure on the global fertilizer market. While the US currently does not import fertilizer from Russia, many countries in Europe and South America do. Global fertilizer supplies had already been limited due to a number of factors, including export restrictions imposed by China and Russia, economic sanctions on Belarus, and the curtailing of fertilizer production in Europe given the very high natural gas prices there. All of these events preceded the Russian-Ukrainian war and fed into the high global prices for fertilizer this past fall. The fallout from the war will continue to limit global fertilizer supplies and support high natural gas prices, leading to continued high prices for fertilizer. Thus, crop production costs are rising dramatically, but crop prices have as well.
The crop most directly impacted by the war is wheat, specifically winter wheat. Russia and Ukraine produce roughly one-seventh of the world’s wheat (Table 1). Both countries are major exporters of wheat. In 2021, Russia’s wheat crop was smaller as production issues hampered winter wheat. Ukraine, on the other hand, saw a sizable boost to their wheat production. In total, world wheat production increased very slightly with the 2021 crop, leading to a tightening of the wheat market as wheat consumption continues to grow. The war exasperates this, as the fight and the associated sanctions lock up and potentially remove some Black Sea wheat from the global market. The war also impacted the upcoming 2022 crop as the vast majority of Russian and Ukrainian wheat was planted in the fall. Roughly 70% of Russia’s wheat and 97% of Ukraine’s wheat is winter wheat. So the war is likely damaging those crops and reducing expected production in the Black Sea region.
But wheat is not the only crop market impacted. Both the corn and soybean markets have also been pressured by the war. For soybeans, the pressure is indirect. While Russia and Ukraine are not major soybean producers, they are major sunflower producers. In fact, the two countries export roughly 80% of the global trade total in sunflower oil. And given the substitutability of vegetable oils, all of the oilseed markets, including soybeans, have reacted to the war. The corn market has felt both direct and indirect impacts from the war. The indirect impacts result from the competition between corn and wheat in the global feed markets. The direct impacts come from the growing supplies of corn originating from the Black Sea region (Table 2). Both Ukraine and Russia have been increasing corn production over the past decade, with most of the production heading to the export markets. Over the past year, USDA had signaled that Ukraine was poised to capture a larger share of corn exports to China. The war has essentially blocked those crop movements.
Prior to the start of the war, old crop winter wheat prices (represented by the Chicago and Kansas City markets) had been relatively flat in the early part of 2022. Spring wheat prices (represented by the Minneapolis market) have actually worked a bit lower. The impacts of the drought in South America had boosted soybean prices, while corn split the difference between the soybean and wheat markets, with soybean prices up roughly 20% and corn prices up 10% prior to the war. As the Russians invaded, old crop prices initially jumped in unison, with winter wheat prices passing corn and catching up to soybeans in percentage terms, before falling back during the first weekend of the war. Since then, price volatility has been experienced in both directions. All wheat prices spiked higher in the first week of March, with Chicago wheat futures peaking 70% higher than at the first of the year. KC wheat prices were 60% above the initial prices of the year, while Minneapolis wheat rose 25% higher. Corn prices moved somewhat higher as well, while soybeans saw the smallest shift. However, as the war continues and cease-fire talks start and stop, the wheat markets have cooled. As of March 11, 2022, winter wheat prices still have seen the largest percentage gains, with Chicago up 45% and KC up 38%. Old crop corn futures are nearly 30% higher, while old crop soybeans are up 22% and spring wheat is 11% higher.
The jumps in new crop prices haven’t been quite as large, but they have made the acreage discussion for 2022 much more interesting. As with old crop prices, the various wheat prices had been trailing corn and soybean prices in the early part of 2022. As the reports on South American production declined, corn and soybean prices worked higher throughout February. The war shot new crop winter wheat prices past corn and soybeans in relative terms, with spring wheat bouncing higher for a brief time, before falling back. New crop Chicago and KC wheat futures are currently 33% higher than the start of the year. New crop corn futures are 20% higher, with soybeans and Minneapolis wheat up roughly 15%.
The big swings in prices have created issues along the marketing chain for crops. Some merchandizing locations have pulled spot bids temporarily, while other locations moved their base of their bids from the nearby futures contract (March) to deferred contracts (mainly May), in an effort to reduce cash price volatility and find a better buyer/seller balance (while many folks like to sell $7.50 corn, many others do not like to buy it). As the real impacts of the war on crop markets are revealed, the price volatility should slowly decline. But until then, producers and end users should expect a bumpy ride. The advantage to crop producers is that the federal crop insurance prices captured some of the heightened prices, with the revenue insurance products having the second highest corn price ever and the highest soybean price ever. Producers have a myriad of opportunities to lock in some of the best prices in roughly ten years, with old crop corn cash bids north of $7 per bushel and new crop corn bids above $6 per bushel and similar pricing for soybeans. For those that were able to lock in their input costs this fall, these prices offer significant profit potential. For those who were not able to lock in those costs, the prices are likely still robust enough to provide a profit, but the cost squeeze is definitely building up.
Listen to the March 2022 Crop Market Outlook video for further insight on outlook for this month.
Chad E. Hart, extension economist, 515-294-9911, firstname.lastname@example.org