Potential shortfalls in agricultural supply on world markets
As the Russian military is about to conduct a hostile takeover of Ukraine, energy and gold prices are skyrocketing, as I predicted in my SA article published on January 16, 2022 Energy and Gold Prices to Soar After Likely Russian Invasion; global food prices can rise as dramatically as their energy and gold counterparts.
Russian military ground forces are at various points on the Ukrainian border and the Russian Navy controls the Black Sea, effectively blocking five critical Ukrainian ports used for grain exports: Odessa, Mykolaiv, Kherson, Mariupol and Berdyansk. It remains to be seen whether Ukraine’s agribusiness will be able to plant, harvest and sell its agricultural products for export. In terms of timing, planting takes place in spring and harvesting in late summer and early fall.
Due to the above-mentioned uncertainties, there could be a considerable shortfall in crop yields and/or limitations or restrictions on Ukrainian agricultural exports, the breadbasket and export powerhouse of Europe, whether due a temporary blockade or a long-term limit or restriction.
For these reasons, I believe that agricultural commodity prices have strong upside potential to remain high in the short to medium term beyond current inflationary trends. Furthermore, I think that the markets have not priced in this additional risk, which presents excellent buying opportunities.
Invest in agricultural funds
The following list of agricultural funds includes options for broad-based or more specific investing.
As a reminder, regarding their fundamental differences, an ETF invests in a fund of the asset it tracks while an ETN is like a bond, an unsecured debt security issued by an institution.
Farming | wide base
- Teucrium Agricultural Fund (TAGS)
- iPath Series B Bloomberg Agriculture Total Return ETN Sub-Index (JJA)
- ITEMS related to the Rogers International Commodity Index – Agriculture Total Return ETN (RJA)
- Teucrium Wheat Fund (WEAT)
- Corn Fund Teucrium (CORN)
- iPath Series B Bloomberg Grains Total Return ETN Sub-Index (JJG)
- ITEMS related to ICE BofAML Commodity Index eXtra Grains Total Return (GRU)
My prediction of a sharp increase in prices for agricultural products due to potential or actual hostilities in Ukraine could be dampened by exports from agricultural powers such as the United States, Canada, Brazil and other European countries to countries that are heavily dependent on Ukrainian agricultural exports.
However, I think there would be a gap between actual restrictions on Ukrainian exports and subsequent replacement exports from the aforementioned countries. Also, there will always be a shortfall to meet any normal demand due to the lack of ships available to transport the goods.
Overview of Ukrainian Agriculture
The importance of Ukrainian grain production and exports cannot be overstated. The 2022 agricultural yield predicts a considerable increase compared to previous years. Ukraine’s average annual yield is three times its domestic needs, making it one of the largest agricultural exporters in the world.
The following data are details for each crop provided by the World Data Center for Geoinformatics and Sustainable Development:
- Ukraine’s grain production consists of wheat, corn, barley and rye.
- 4and largest maize exporter (eastern and southern Ukraine), planted in April/May, harvested in September; and barley (eastern Ukraine), planted in April and harvested in August.
- 6and largest wheat exporter (south and south-central Ukraine). It is a winter wheat sown in the fall and harvested the following summer.
- 7and leading exporter of soybeans.
- World’s leading exporter of sunflower seed oil (southern and eastern regions), planted in April harvested in September. It is their most profitable crop due to low production costs and high demand.
- Most exports are sent to Spain and Italy, North Africa, the Middle East and East Asia (China, Japan, Korea).
- Russian and Ukrainian cereal production represents 30% of the world stock, a market share that has doubled since 2014.
World food supply and prices
World food prices started to climb dramatically in 2021 and will accelerate in 2022. The pre-war market factors are as follows:
- Higher prices for pesticides.
- Higher prices for fertilizers.
- Severe weather events such as floods and droughts have had a negative impact on crop yields.
- Labor shortage in logistics and agricultural services.
- Global supply chain disruptions.
Finally, the food export restriction policy of even small countries has an impact on global food prices as illustrated in the following link called the exponential domino effect in which a seemingly small and insignificant factor becomes a powerful multiplier effect that triggers a disproportionate crisis well beyond its national borders.
An example is that in 2021, Russia imposed export taxes on its grain harvest to keep more stocks at home. For this reason, countries that purchased grain from Russia were forced to seek alternative sources such as neighboring Ukraine.
The following chart titled Food Price Index from the Food and Agriculture Organization of the United Nations (FAO) shows an explosive price increase in major food categories. These food prices will skyrocket when war rages in Ukraine.
Russia and Ukraine are doing very well in a water-starved world
Russian and Ukrainian agricultural production has experienced dazzling success with abundant harvests and whose harvesting regions have avoided, by default or on purpose, water stress. While most other countries will struggle with grain production in the future, Russian and Ukrainian grain production will be robust, giving them increased market share and better price leverage.
The following chart titled Where water stress will be highest by 2040 provided by the World Sources Institute via the Economist Intelligence Unit projects this trend globally for the next 18 years. The UN defines “water stress” as when a country withdraws at least 25% of its renewable freshwater supply.
A Russian invasion and occupation will further squeeze an already tight food market as many governments have, officially and unofficially, limited or even outright banned the export of domestic agricultural products. This was done for purposes of food security and keeping food prices affordable to avoid socio-political instability.
For all the above reasons, I foresee a dramatic increase in agricultural prices and recommend investing in the agricultural sector.