Thursday, December 8, 2022

Russian invasion of Ukraine pushes up farmgate prices

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Australia wheat farmers can expect increased farmgate prices following Russia’s invasion of Ukraine, although the local impact is not expected to match that seen globally.

Together, Russia and Ukraine make up nearly 30% of global wheat exports. Ukraine’s military has suspended commercial shipping at its Black Sea ports, which is tipped to disrupt the supply chains of grain and oilseeds exporters.

Odessa port
Odessa commercial sea port.

This is the first time since World War 1 that access to all Black Sea wheat exports has been lost, when the Ottoman Empire blockaded the Dardanelles Strait – the only route for Russian wheat to move to allies in the United Kingdom and France. Chicago wholesale wheat prices (CBOT) rose 77% between June 1914 and February 1915.

CBOT wheat prices lifted 12% above the five-year average in October 1914 – when Black Sea access was lost – while wheat prices had soared 49% above the five-year average on the eve of Russia’s invasion.

Chicago wholesale wheat prices (CBOT) prices for wheat, corn, and soybeans are currently up 33% month on month, 19% and 9% respectively.

Export disruptions are expected to push up global prices by 30% from a CBOT base of $7.50 per bushel, according to Rabobank, with possibly much more price upside if both the conflict continues into the July Black Sea harvest window, and also if Russian wheat is not reaching the global markets due to sanctions.

“The upside impact on Australian pricing is expected be more tame than global,” Rabobank analysts Cheryl Kalisch Gordon and Dennis Voznesenski said.

“Australian exporters will face increased demand, and while farmgate prices will benefit, they will likely not see the full upward impact of a global price rise due to Australia’s large recent harvest, limits on export capacity, and positive outlook for the 2022 season.”

Following the 2017-19 drought, Australia has produced two consecutive record crops and wheat production is expected to reach 34.4 million tonnes in 2021/22. The next Australian harvest is in September.

High global prices and constrained export capacity has basis trading at its most negative in 12 years. According to Rabobank, if basis remains constant and there is a full-scale conflict, prices could rise to from $367 to $425 per tonne in the June quarter, and if the conflict does extend into mid-2022 with a stable basis they could move to over $600 per tonne.

“In reality, basis would likely move more negative, particularly in the near term, due to large Australian supplies and limits on export capacity, dampening price upside.”

Due to current policies, land wouldn’t be cleared, but wheat area could rise if farmers switch cropping rotations in favour of more wheat, or if livestock operators switch to cropping, Rabobank said. Rotational considerations will be a limiting factor for farmers.

Beef impact limited, but market may have peaked

Russia’s role in the global beef trade has dwindled in recent years. In 2013, it accounted for 13% of global beef imports, but this was down to just 2% in 2020.

“As such we are expecting minimal direct impact on global beef trade as a result of the conflict. However, there are likely to be indirect impacts in the form of higher costs (feed and energy) and any imposition of secondary sanctions may have wider implications,” Rabobank analysts said.

Australian cattle prices have were steady for much of late January through into February, and saleyard cow prices have stabilised since.

Heavy cattle rose slightly, indicating a shortage of these finished cattle, but feeder and restocker markets were more stable, suggesting there are more of these cattle flowing into the system and producer appetite is waning.

“Despite ongoing favourable seasons, the increase in young cattle numbers may well mean this is the top of the market.”

Slaughter numbers for 2021 down 17% annually to their lowest level in 37 years, although an increase in the December quarter figures suggest the herd is rebuilding.

January beef exports were down 13% year on year in January, to their lowest volume in 11 years. Volumes to Japan have been on a downward trend as Japanese buyers contend with high prices and lower consumer purchasing activity.

Minimal impact from the Russia-Ukraine conflict is expected on the sheepmeat market, while the dairy market could be exposed to higher feed and fertiliser prices, and inflationary risks rising from higher energy costs.

Russia and Ukraine, and the Black Sea region more broadly, do not figure highly in global cotton trade patterns either. But the sector remains prone to impacts stemming from factored in, and potentially stronger, price increases for fertiliser and energy. Higher inflation will also be weighing into market positions.

One risk could be the United States expanding sanctions to countries that choose to still trade with Russia, which means Australia may no longer be able to export cotton to China. This would cause a severe drop in ICE#2, but “ongoing access to cotton imports would be a key in China’s considerations of how to play its cards under in the current circumstances, given how important the cotton milling and textiles sector is to China”, Rabobank said.

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