This week, a Russian military campaign was launched in Ukraine, turning heads around the world. Commodity markets, too, noticed and responded.
As the situation constantly evolves, over the coming days and weeks, producers are urged to pay attention to their costs, which could be on the rise as supplies tighten in feed and energy markets. It is advisable for producers to work with their suppliers to plan ahead, to have the best chance at keeping expenses under control.
Ukraine: a leader in agricultural exports
According to the World Bank’s ‘World Integrated Trade Solution,’ more than 38 per cent of all Ukrainian exports in 1996 went to Russia, with China, Belarus, Turkey and Germany rounding out the top-five export destinations. However, more recently, trade flows with Russia have dried up, strengthening ties with other markets. By 2018, exports to Russia made up only 7.7 per cent of the Ukrainian total, while exports to European Union (E.U.) member states markedly increased.
According to the Food and Agriculture Organization of the United Nations (UNFAO), in 2020, Ukraine was the fifth-largest exporter of wheat, fourth-largest exporter of corn and the second-largest exporter of barley and the world’s largest exporter of sunflower cake and oil.
These top Ukrainian exports were primarily destined for China and Egypt, with the Netherlands, Spain and Turkey rounding out the top-five destinations. It is not surprising that most of the grain exports go to the world’s largest grain importer, China. However, the current conflict between Russia and Ukraine will most likely cause a disruption to production and exports. This means there will be a significant void in Chinese import supply to be filled, which will affect grain prices for all other export partners, including Canada.
The impact on grain markets
As the conflict between Russia and Ukraine drags on, global markets will continue to factor in the cost of the affair. All major stock exchange indices have dipped, while, in contrast, the price of gold has increased, indicating investor flight to safety. Implications for trade and logistics within Europe have also been seen, which has resulted in a stronger Canadian dollar, relative to the Euro, which is used in most E.U. countries.
The stronger Canadian dollar also impacts Canadian hog farmers. Because the Euro is weakened, in the major pork markets of Spain and Germany, which use this currency, pigs have become more price-competitive. However, the most relevant impacts are to the price of grains.
China’s need to fill the grain market void left by Ukraine is expected to push prices higher. This has already occurred for us on the local level in western Canada. While Alberta spot prices for wheat have jumped anywhere from $3.30 to $8.44 per tonne, and canola from anywhere between $3.86 to $7.00 per tonne, deferred prices on grains and oilseeds have also jumped. For example, CWRS 13.5% protein, CSPR 11.5% protein and CDA canola for November delivery are up $7.20, $10.65 and $8.18 per tonne, respectively. If these prices hold, feed costs could remain elevated throughout the rest of 2022.
Recent predictions from Brett Stuart, a market analyst with Global AgriTrends, indicated that escalating interruptions through the Black Sea – Ukraine's maritime transport link to the rest of the world – could see global grain prices rise by 20 to 40 per cent, with corn at the lower end and wheat and barley at the higher end. This, compounded by the dry conditions hampering South American crops, could sound alarm bells for feed markets.
The impact on energy markets
In addition to higher feed costs, electricity, heat and freight could be next. For the first time in almost a decade, West Texas Intermediate (WTI) crude oil prices have pushed upwards of $100 per barrel. Russia is a major global energy producer. As economic sanctions are placed on Russia, in response to the conflict with Ukraine, trade with major partners could end, leading to lower global supplies and higher prices for crude oil and natural gas. In our interconnected world, this could translate to higher costs for Canadian producers.
Keep an eye on costs
Producers are, once again, reminded to carefully track their cost of production and make sound choices when it comes to preparing for the months ahead.
Alberta Pork will continue to monitor the situation in Ukraine and provide market updates as appropriate and necessary, for the benefit of producers.
For more information, contact Bijon Brown, Production Economist, Alberta Pork by email at firstname.lastname@example.org or by phone at 780-440-8460, toll-free at 1-877-247-PORK (7675).