Russia has invaded Ukraine. This has created an unprecedented level of uncertainty for both the intermediate and long term, says Chad Burlet of Third Street Ag Investments, LLC.

In the short term, it’s clear that all Ukraine and most Russian shipments of grains and oilseeds will be halted. The ports lack both the vessels and the people to load them. With many Russian banks being banned from the SWIFT system, there is also the question of whether an exporter could even get paid.

The intermediate and long-term impacts of this war are almost unknowable as they depend not only on the actions of Putin, but also of other world leaders. Relevant questions include: what sanctions will be imposed; how effective will they be; and how will Putin respond? They also extend beyond current shipments into new crop production. How many hectares in Ukraine will get planted and harvested? How much fertilizer will flow out of Russia and to which destinations?

The drought in South America has already tightened the world’s corn and soybean balance sheets considerably, and last year’s drought in the North American plains tightened the balance sheet for milling wheat. In the current environment, the loss of Ukraine and (possibly) Russian exports is potentially explosive. Together, those two countries are 29% of world wheat exports and 19% of world corn exports. Soybeans are far less reliant on the Black Sea, but it does supply 77% of the world’s sunflower seeds and oil. With palm oil prices already at record highs the world can’t afford to lose any supplies of vegetable oil.

With so much uncertainty, prices have become extremely volatile. On February 24, corn, wheat, and soybeans all traded limit up; soybeans only briefly and wheat for much of the trading session. On February 25, wheat traded more than limit down as the price limits were removed from the March contract as it moved into its delivery period. To provide some historical context, Chicago March Wheat futures had a 13% trading range last Friday, that $1.10 range in a single day was greater than the entire range from mid-spring 1998 to mid-summer 2002.

Until Putin sent his troops into Ukraine, the agricultural world was focused primarily on South American weather and it was beginning to focus on Northern Hemisphere acreage prospects, soil conditions, and long term weather patterns. In the February WASDE the USDA only lowered combined soybean production in Brazil, Argentina, and Paraguay by 8.7 million metric tons (MMT). Private crop analysts are now 12-18 MMT lower than the USDA for those three countries. The USDA made minimal reduction to their South American corn estimate as the main crop in Argentina and the safrinha crop in Brazil were just getting planted.

On the morning of February 24, the USDA released its first estimate of US acres at its Agricultural Outlook Conference. Of course, all attendees recognized that those numbers had become obsolete 12 hours earlier when Russian troops moved into Ukraine. USDA analysts, (there will be no farmer survey until March), estimated corn, soybean, and wheat acres at 92, 88, and 48 million, respectively. Their soybean carryout was slightly below market estimates and their corn carryout was above, but both of those can be changed rather quickly by South American weather, Black Sea developments, and US planting conditions.

Turning our attention back to the Black Sea, the US is not currently priced to make up for lost or delayed wheat exports. US wheat has been the most expensive wheat in the world for much of the crop year and it remains there today. The only scenario where we see a meaningful increase in US exports would be if the US government increased wheat donations to developing countries that are being hurt by near record food prices.

If weather, political or military developments push world food prices significantly higher we would expect a food vs fuel debate to develop in this country. Energy interests would wisely point to renewable fuel programs as a major contributor to the higher food prices that are hurting the most vulnerable in this country and overseas. We’ve already seen many countries reduce their current use of renewable fuels as well as their future targets. If those programs come into question in this country, the potential changes in US and world balance sheets would be greater than they have been for decades.

Learn more about Chad Burlet at Third Street Ag Investments.