What to expect in commodities in the near term


Russia’s invasion of Ukraine has put severe pressure on world grain prices and the global food system.

While food products are excluded from most of the financial sanctions imposed on Russia, the conflict poses several challenges for production and supply chains.

With the conflict affecting both ports and trading centers, businesses and industrialists sought to export part of the harvest by rail.

Prior to the invasion, the Ukrainian Agribusiness Club (UCAB) hoped to export 15 million tons of grain in 2022. Using the railways, they believe they could export around 600,000 tons of grain per month.

However, if the conflict were to continue in the medium term, UCAB estimates that production in Ukraine could be affected by up to 60%.

According to a study by Algebris Investments, Ukraine is responsible for 10% of global wheat, 14% of corn, 17% of barley and 51% of global sunflower seed oil exports.

That’s why the market is now focusing on other production sites that could fill this gap – one notable location comes to mind. “We really need a good crop in the US this year,” said Barings fund manager James Govan.

The United States Department of Agriculture released its Late Planting Forward Data, which showed that while soybean, wheat and cotton acreage is expected to increase slightly, corn acreage is expected to reach 89.5 million in 2022, the lowest in five years and down 4%. from 2021.

“I don’t think there will be a shortage of supply, but you will pay the price because stocks will be reduced,” Govan said. Citywire Selector.

The United States is the world’s largest corn exporter, having traded 69.8 million metric tons in 2021, according to the US Grains Council.

Rising prices and pressure points

Edible oil prices are expected to remain high for at least the next two years with strong demand, Govan said, with U.S. processing, distribution and fertilization companies set to benefit from the current environment.

“This should mean strong profitability for farmers, despite the increase in agricultural inputs we are seeing on fertilizers and crop protection seeds,” Govan said (pictured below).

Govan, who oversees the Global Agriculture fund, has been the best-performing manager in Equity – Agriculture over the past three years, returning 52.7% in dollar terms versus an average of 26.7%. Over the past year, it ranks second, returning 10.5% compared to an average negative return of 3.7%.

Jeneiv Shah, who co-manages the Sarasin Food & Agriculture fund, increased her exposure to benefit from rising crop and grain prices. “We also expect fertilizer prices to remain elevated for longer, which should lead to sharp earnings revisions for these growers and an increase in portfolio weightings.”

On the other side would be food manufacturers and ingredient companies, trying to push through higher prices to avoid seeing their margins squeezed.

Both managers say they had no direct exposure to Ukraine at the time of the invasion, with very little indirect exposure to food manufacturers using Ukrainian exports such as wheat or sunflower oil.

Nevertheless, he said that there are interesting opportunities in two Ukrainian agricultural enterprises, namely the chicken breeding and production company MHP and the distribution company Kernel, listed on the Polish stock exchange.

Fertilizer: a short-term challenge

Before the invasion, fertilizer products were already on the rise, having jumped about 40% on average over the past five years. Now they have risen again due to rising natural gas prices and pandemic-related bottlenecks.

Russia exported $7.6 billion worth of fertilizer in 2020, making it the world’s largest exporter, according to the Observatory of Economic Complexity. The main export destinations are Brazil, Estonia, India, China and the United States.

However, the country has suspended fertilizer exports, which could lead to a doubling of prices, which could lead to a 44% increase in food prices, according to research by Algebris.

“You’re probably still going to see fertilizer being dragged around China. But other than that, it’s a big deal,” Govan said.

According to a study by SilverStreet Capital, Russia, Ukraine and Belarus accounted for 17.4% of global fertilizer exports, with Russia and Belarus jointly accounting for 40% of potash shipments.

“One of the consequences of these sharp increases in fertilizer prices is that farmers around the world may, at the margin, use less fertilizer per acre,” said Gary Vaughan-Smith, CIO of SilverStreet. “We expect this to have a significant impact on food production in Africa this year.”

Additionally, Ukraine is also a major exporter of agricultural equipment and machinery, which could cause potential problems for the market in the coming months.

Relaxation of mandates on biofuels?

Ground corn and sugar are sources of ethanol, a biofuel widely blended with gasoline. This is why some managers believe that grain prices are starting to become highly correlated with energy.

Govan thinks governments could relax policies on biofuels, although this is a less environmentally friendly measure. It might not be useful globally, he said, but it might be beneficial from an economic perspective.

“I think biofuel will be the easiest lever to pull, but it’s actually quite complicated to do,” Govan said. “They should create an economic incentive for production that was initially oriented towards biofuels, to move towards food supply instead.”

Looking ahead, Shah said efficient and precise farming processes are becoming increasingly relevant, apparently attracting market attention.

“Equipment vendors are integrating hardware such as sensors, robotics and cameras, with software and data to help farmers make better agronomic decisions, while feed, health and genetics are looking for ways to improve yield and reduce disease losses.


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