Ukraine invasion: Implications for wheat, corn, veg oils explored

Russia’s invasion of Ukraine is “the most disruptive thing I’ve seen in my 35-year career.” That was the remark of Paul Hughes, chief agricultural economist and director of research and agribusiness at IHS Markit, now part of S&P Global, at the opening of a webinar on the invasion’s implications for the wheat, corn and vegetable oil markets.

The webinar was hosted by IHS Markit’s Ken Eriksen, head of client advisory and development, energy and transportation and policy.

“Russia and Ukraine have grown tremendously over the past 10 years in ag exports,” said Hughes. Between them Russia and Ukraine have produced, over the past five years, about 28% of world wheat exports (Russia providing 19% and Ukraine about 9%), about 17% of total world corn exports (most coming from Ukraine) and a whopping 76% of world sunflower seed exports (of which Ukraine provides 51% and Russia 25%).

Commodity scenarios

The webinar laid out four possible scenarios developed by IHS Markit that could affect how the conflict could affect world markets for wheat, corn and veg oils. In one scenario (not considered likely), all exports from Ukraine are eliminated.

A second scenario added in stronger sanctions against Russian products. At present, some Russian banks are barred from the SWIFT interbank system that facilitates large money transfers, but not all Russian ag products are completely banned. There is a debate going on in Europe about whether completely banning Russian wheat, for example, would hurt third parties since a lot of Russian wheat goes to volatile countries in the Middle East where bread is a staple of the poor. Hughes said the team scored this scenario at a 20% probability. Already in March, 400 million tons of Russian wheat have been exported to Egypt, Iran and Turkey.

The third scenario added in the conflict lasting more than six months, which would affect the crop year and plantings for the next crop cycle. If that happens, diesel and fertilizer shortages, seed shortages and banking restrictions would combine to restrict output. The team considered this scenario the most likely and gave it a 60% probability.

“Ukraine may not be doing any ag exports for the next 12 to 18 months,” Hughes said.

During times of crisis and shortage, Hughes said, food for humans takes precedence in the demand hierarchy, with animal feed coming in second and energy uses third. “Wheat needs to price itself out of animal feed rotations,” he said, in order to be diverted to human food needs. The European Union could decide to allow GMO corn to be fed to animals, but global feed demands would still need to decline “substantially,” he said. He also said world trade and consumption would have to decrease, although he admitted that’s “difficult to do.”

What effects will price increases have on commodity stockpiles? Only a few countries have big stockpiles, Hughes said, and it remains to be seen whether China will auction off its stockpiles of wheat or soybeans if prices get high enough. Michael Langemeier, associate director of the Center for Commercial Agriculture at Purdue University, said some observers are skeptical about the condition of China’s corn reserves.

Peter Meyer, Platts head of grain, oilseed, and advanced feedstock analytics at S&P Global, noted that Russia had already been restricting its fertilizer exports before the invasion. He said its announcement that it was ending fertilizer exports would affect South America much more heavily than North America.

Demand pressure on veg oils

In the wake of the invasion, the European Union has announced that it will end all European dependence on Russian oil and gas imports by 2027. Among all the energy technologies offering an alternative to fossil fuels, renewable diesel is standing out from the pack and will become increasingly important if Europe sticks to its resolution.

The resulting pressure on veg oil supplies and prices will affect the United States as well, where projected demand for soybean and other veg oils for renewable diesel has already spurred investments of billions of dollars in crush plants and refining facilities that are due to come online over the next two years. Whether or not the tightened supply outlook will slow those plans is now an open question.

The EU imported 32.5 billion pounds of veg oil, much of it rapeseed oil and sunflower oil from Ukraine. If exports from Ukraine cease, Europe will lose about 15% of its oilseed imports. That may cause it to reconsider an upcoming ban on palm oil from Indonesia due to ecological concerns, Meyer said.

David Murray can be reached at [email protected].