The situation in Ukraine has many of us concerned for many reasons. One of the concerns is the affect it may have on U.S. Agriculture.
This is an article just added this week to the Ohio State University Extension Ohio Ag Manager online newsletter provided by Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County
Global impact
The shock to global commodity markets following Russia’s invasion of Ukraine is expected to be the largest in the post-war period, and certainly since the oil crisis of the 1970s. Over the past 30 years, the two countries have become major agricultural exporters, accounting for a quarter of global grains trade in the 2021-22 season (International Grains Council, March 9, 2022).
Across key commodities, they account for a 34, 18, 27 and 75 percent share of volume traded of world wheat, corn, barley, and sunflower oil respectively (International Food Policy Research Institute, February 24, 2022).
With Russia blockading ports on the Black Sea, 16 million tons of grain are currently stranded in Ukraine, USDA forecasting Ukrainian-Russian wheat exports to fall by 7 million tons in 2021-22, Australian and Indian exports only partially filling the gap (USDA/WASDE Report, March 9, 2022)
Also, despite reports of some spring crops being planted in Ukraine, outgoing Agriculture Minister Roman Leshchenko expects total area sown to be reduced by 19 million acres (Reuters, March 22, 2022).
Not surprisingly a market shock of this magnitude has affected both the volatility and level of prices, wheat futures at one point moving above $14/bushel, and eventually falling back to just over $10/bushel, reflecting uncertainty among traders about the invasion. In turn, the increase in grain prices, are having a significant effect on global food prices and hence food security.
Even before the invasion, several factors were already driving up food prices, including poor harvests in South America, strong global demand, supply chain issues, reduced global stocks of grains and oilseeds, and an input cost squeeze mostly due to rising fertilizer prices.
Adding in the effect of the invasion, global food prices are now reaching levels not seen since the so-called “Arab Spring” of the early 2010s (UN/FAO, March 2022).
The steep decline in grain exports has led to institutions such as the UN World Food Program expressing concern about global food security, the cost of buying food forecast to rise by $23/month – a significant increase to those living off $1.90/day, the World Bank definition of poverty (New York Times, March 20, 2022).
Countries in the Middle East and North Africa such as Egypt, the Lebanon and Tunisia are very dependent on grain imports from Ukraine and Russia, the risk of food price inflation stirring up political and social unrest.
On top of this, there is concern other countries will adopt “beggar-thy-neighbor”-type controls on grain exports to protect their own populations, that will simply intensify the food price spike (Financial Times, March 23, 2022).
Implications for US ag
We are experiencing higher fuel prices at the pump, grain markets (especially wheat) rallied on news of the invasion and resulting sanctions, and the invasion created further uncertainty for fertilizer costs.
What does the future hold for fuel, fertilizer, and grain prices? It is impossible to say with certainty, but the market does not like uncertainty.
In other words, expect a great deal of continued volatility. Harwood Schaffer and Darrel Ray, Agriculture Policy Analysis Center at the University of Tennessee (MidAmerica Farmer Grower, March 4, 2022), make the following points about possible impacts:
• Russia may try to broker a deal with China to avoid trade sanctions. If this happens, the U.S. may be able to capture markets previously served by Russia.
• If the war continues, who will harvest the Ukraine wheat crop and how will it be transported?
• If the consensus is that the wheat crop will be short, expect an increase in prices.
• If commodity prices do increase, will it be enough to cover rising fuel and fertilizer costs?
Scott Stiles, agricultural economist, University of Arkansas, says the war may provide an opportunity for the U.S. to sell more corn to China and the European Union, who have historically purchased corn from Ukraine (Ryan McGeeney, U of A Division of Agriculture, March 3, 2022).
University of Illinois agricultural economists Gary Schnitkey, Nick Paulson, and Krista Swanson, and Carl Zulauf, Emeritus Professor, Ohio State University (Weekly Farm Economics, March 29, 2022), offer the following potential impacts:
• Wheat has seen positive price movement. Because corn is a substitute feed grain for wheat, corn prices may see a greater increase than soybeans.
• Do not underestimate the resourcefulness of Ukrainian farmers. However, continued fighting and planting disruptions may lead to higher prices.
• Expect continued price and availability uncertainties in the fertilizer market.
In summary
The invasion of Ukraine is proving a significant shock to global commodity markets, with the very real prospect of worsening global food insecurity as net food importing countries face shortages of key staples such as wheat.
In the short run, the expectation is that there are real limitations on the ability of the U.S. to meet the shortfall: winter wheat is already in the ground, stocks are low, drought conditions are likely to impact yields in states such as Kansas, and farmers face an input price squeeze (Financial Times, March 14, 2022).
Not surprisingly, there is political pressure on USDA to allow farmers to plant on land enrolled in the Conservation Reserve Program (CRP) without penalty (Reuters, April 1, 2022).
Tony Nye is the state coordinator for the Ohio State University Extension Small Farm Program and has been an OSU Extension Educator for agriculture and natural resources for over 30 years, currently serving Clinton County and the Miami Valley EERA.
