Ukraine invasion roils corn markets

Ukraine was the breadbasket of the old Soviet Union, and since the latter’s breakup it has become Europe’s and the Middle East’s breadbasket as well. Up to 70% of its land is arable; it’s the world’s largest concentration of fertile farmland outside the United States’ Great Plains and Mississippi River basin.

Much of its ag export increases to Europe have come in the form of corn.

Jim Mintert, executive director of the Center of Commercial Agriculture at Purdue University, points out that in 2000 Ukraine produced 1% of the world’s export corn. Since then, it has rapidly ramped up corn production, producing about 16% today.

Russia is also a major grains exporter, but its commodities are under sanction. Russian banks have been shut out of the SWIFT system that facilitates large financial transactions, including big commodity trades. Turkey, which controls the Bosporus and Dardanelles straits leading out of the Black Sea, has said it will deny passage to Russian vessels attempting to leave, so Russian exports of bulk commodities by that route are halted. Added to weather concerns in Brazil and Argentina, the Ukraine conflict has sharply spiked corn prices.

According to Mintert, corn traders are already switching originations to U.S. from Black Sea ports, leading to a corn basis spread between river port corn terminals and those farther inland. It’s also leading to a futures inversion in the Chicago commodities market. Usually, futures contracts contain an incentive called the carry to encourage continued storage, but now pressure to sell instead of store means those futures contracts may offer less reason to store.

Mintert said market signals are strongly encouraging cash sales now. “[T]he corn futures market is signaling that corn is needed sooner rather than later in the crop year … Producers in locales where corn basis is unusually strong should consider moving corn at these favorable basis levels. Basis levels can be secured using either basis contracts or cash sales. … Recognize that futures prices will be very volatile for the remainder of this crop year as the market continues to absorb the implications of shifting world trade patterns, possible production shortfalls in South America and spring planting decisions and progress in the U.S.”

Those market signals may influence planting decisions too. The rising costs of inputs, especially fertilizer, may have encouraged moving acreage to soy, but rising demand for corn will likely continue for the rest of the year to tighten the market—and keep corn prices high.

“The longer the Russia-Ukraine conflict lasts, the more insecurity about food supplies it may bring not only to the Ukraine and the region, but also to the whole world,” according to IHS Markit, now part of S&P Global.

David Murray can be reached at [email protected].